Is keeping rates higher for longer the same as a rate hike?

In January, the Federal Reserve’s favored metric for measuring underlying inflation, the core personal consumption expenditures (PCE) price index, experienced its most significant increase in nearly a year, rising 0.4% from the previous month and 2.8% on a year-over-year basis. This surge underscores the Fed’s cautious stance on reducing interest rates anytime soon, despite inflation-adjusted consumer spending declining for the first time in five months and real disposable income remaining largely unchanged. The core PCE data, considered a more accurate reflection of inflation trends minus food and energy costs, suggests persistent inflationary pressures that have kept Fed officials wary of declaring a victory over inflation.

The detailed report indicates a mixed economic landscape where services inflation, especially in sectors excluding housing and energy, saw a notable increase, driven by significant rises in portfolio management and accommodation costs. This scenario complicates the Federal Reserve’s decision-making process ahead of its March meeting, with key officials expressing varied interpretations of the latest inflation data. The overall economic picture is further muddled by a robust labor market supporting consumer spending, yet high borrowing costs and ongoing inflationary pressures are beginning to dampen consumer outlays, particularly in goods spending which saw a significant drop, the largest in over a year.

Amidst this backdrop, Federal Reserve officials, including Atlanta Fed President Raphael Bostic, remain optimistic, suggesting potential rate cuts by the summer, while others urge caution, noting the uneven path toward achieving a 2% inflation target. This latest PCE report, critical for the Fed’s upcoming policy decisions, reflects the complex interplay of factors affecting the U.S. economy, from shifting consumer spending patterns to inflation dynamics, signaling a cautious path forward for policymakers and investors alike in navigating the current economic environment.

Our take (from the Straight to Smart newsletter):

Fed Minutes Scream What The Fed Won’t Say Out Loud

Article Excerpt:

The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.4% from December, data out Thursday showed. From a year ago, it advanced 2.8%. Economists consider this to be a better gauge of underlying inflation than the overall index.

Inflation-adjusted consumer spending dropped for the first time in five months after a robust holiday shopping season, according to the report from the Bureau of Economic Analysis. Real disposable income, the main supporter of spending, was little changed.

Read more (subscription may be required): Fed’s Preferred Inflation Metric Increases by Most in a Year

Do you want expert help evaluating the best alternatives for you and your business?

Call us at (415) 510-2100 or use the chat box on this page to sent us a message. We’ll help you right away!

YOU MAY ALSO BE INTERESTED IN…

Interest Swaps or Rate Caps

Interest rates are in constant flux and having flexibility is critical to adapting and capitalizing on market changes. Whether you’re seeking to satisfy a mandatory hedging requirement from your lender, evaluating a refinancing opportunity or overseeing a portfolio of loans or bonds, every basis point has an economic impact, and we make sure your interests are protected.

To learn more about managing interest rate risk and what your best moves are please click here.

Click To Unmute

Defeasance Services

A successful defeasance, by releasing you from your mortgage obligation, unlocks your ability to take advantage of historically low rates. Derivative is an experienced Defeasance Consultant. We make certain all the intricate legal and financial details are fully completed and done on time. We specialize in making your defeasance stress and worry free.

To learn more about what defeasance is click here.

Check out our defeasance cost calculator.

Click To Unmute