Fed's Favorite Inflation Gauge Boosts; Gold Hits $2,350

After the anti-inflation trend in the first quarter encountered setbacks, this report can at least provide some comfort to Federal Reserve officials.

Data released on Friday showed that the Federal Reserve's preferred measure of U.S. core inflation slowed down in April, which is a step in the right direction for policymakers who are currently seeking confidence that they can start lowering interest rates.

The U.S. core PCE price index annual rate recorded 2.8% in April, unchanged from the previous month; the monthly rate recorded 0.2%, the lowest since December 2023, lower than the expected 0.3%. In addition, the U.S. personal spending monthly rate recorded 0.2% in April, also a significant decrease from the previous month's 0.8%.

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After the data was released, spot gold once surged above the 2350 level, and the U.S. dollar index briefly fell nearly 20 points. Later, due to investors taking profits, gold fell back below $2,340 per ounce, completely giving up all the gains after the PCE was announced.

On the surface, it is clear that this is a positive report. Both overall and core data seem to be very much in line with expectations.

Forexlive analyst Greg Michalowski said that the first reaction to the data release was that inflation was slightly lower, with the core PCE monthly rate falling to 0.2% (but the unrounded core PCE annual rate is 0.249%, which means the monthly rate should be between 0.2% and 0.3%), and the actual personal consumption expenditure monthly rate also fell to -0.1%. This indicates a slowdown in economic growth.

The report was released as the market has been adjusting to the prospect of the Federal Reserve keeping interest rates higher for a longer time than initially feared.

"Fed mouthpiece" Nick Timiraos pointed out that today's PCE data is expected not to change the Fed's recent "wait-and-see" attitude.

After the anti-inflation trend encountered setbacks in the first quarter, the report should provide some comfort to Federal Reserve officials about the inflation path. According to the CME's FedWatch tool, investors expect a 50% chance of the Federal Reserve cutting interest rates for the first time in September, and swap traders still expect the Federal Reserve to cut interest rates at least once this year.

Federal Reserve officials have repeatedly stated that they are waiting for greater confidence in the decline of inflation before cutting interest rates. On Thursday, New York Fed Chairman Williams said he believes inflation will start to decline again in the second half of 2024.In a speech at the New York Economic Club, Williams stated, "I believe that some of the recent inflation data mainly represents a reversal of the unusually low figures from the second half of last year, rather than an interruption in the overall downward trend of inflation."

Brian Jacobsen, Chief Economist at Annex Wealth Management, believes that both income and expenditure data are slightly weaker than expected. Since February, personal disposable income adjusted for inflation has remained flat. The Federal Reserve cannot focus solely on inflation anymore. The way consumers spend money is changing rapidly; they used to spend extravagantly as if there was no tomorrow, but now they are so frugal that they are squeezing every penny until it drips water.