Wall Street’s main indexes opened mixed on Tuesday as investors wait for a crucial inflation report that could influence the decision for interest rate cuts from the Federal Reserve. The spotlight has shifted back to the Federal Reserve’s monetary policy trajectory after a frenzy around artificial intelligence (AI) last week, which overshadowed worries about postponed rate cuts and propelled the S&P 500 and Dow Jones industrials to record highs.
Markets have rallied this year on bets that the Fed would start trimming rates in May but some Federal Reserve governors warned in the last couple of weeks that the interest rate cuts expected by the market in the first half of the year may have been premature. The main event of this week will be the release of January’s personal consumption expenditures price index (PCE), which serves as the Federal Reserve’s preferred measure of inflation.
According to a Reuters poll, it’s anticipated that the PCE will have increased by 0.3% monthly in January, a slight uptick from the 0.2% rise observed in December. Year-over-year, the PCE is expected to have grown by 2.4%, down from the 2.6% increase in the previous month. Should the PCE data show higher-than-expected inflation, like recent consumer and producer price indicators, it may influence the Federal Reserve’s monetary policy stance, potentially leading traders to delay their expectations for rate cuts this year.
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Federal Reserve Rate Cuts
At present, 63% of traders anticipate the Fed initiating rate cuts by June, a notable decrease from the nearly 98% recorded at the close of January, as reported by the CME Group’s FedWatch tool. Expectations for a rate cut in July are currently at 83.6%. Peter Andersen, founder of Andersen Capital Management in Boston, added:
“I think that investors are getting used to the concept that the Fed will not cut rates (soon). Hopes of a soft landing – where the Fed brings down inflation without severely hurting the economy are supporting market sentiment. I’m expecting a favorable print for that (PCE), indicating that the soft landing has gained more momentum.”
Reports on gross domestic product (GDP), jobless claims, and manufacturing activity, which are also due this week, will provide additional insights into the potential timing of rate cuts. Investors will also look forward to comments from some Fed policymakers, including voting members Atlanta Fed President Raphael Bostic, New York Fed chief John Williams, and Fed Board Governor Christopher Waller, who are scheduled to speak this week.
