The Fed's cautious approach to interest rate policy over the past year has given way to an always-follow-the-data mentality. However, Friday's PCE data showed prices rose more than Wall Street expected in March, and officials are likely to “wait and see” before releasing further economic data.
“When it comes to inflation, the Fed cannot rest,” Bank of America Global Research analysts said in a note Friday. “At the May FOMC meeting next week, we think the Fed will take a wait-and-see approach to rate cuts, giving it time to work on policy.”
The core PCE index, which excludes food and energy costs and is closely monitored by the Federal Reserve, rose 2.8% in March from a year earlier. This was above expectations of 2.7% and unchanged from the annual increase seen in February.
Hopes that a rate cut is imminent have dampened after the latest in a series of glowing reports that beat expectations. Fed Chairman Jerome Powell has stressed that the Fed will not cut interest rates until officials are confident that inflation is coming down.
Still, some analysts, like many investors, aren't daunted by the idea that interest rates will stay higher for an extended period of time.
“However, we remain optimistic about the market as we don't believe rate cuts are necessary for the bull market to continue,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said in a note Friday. ” he said. “Rather, continued economic expansion and corporate profit growth, already seen by the market's largest companies, will drive stock prices to new highs.
He added: “Be aware of expected volatility around elections, geopolitical events, and even future inflation data. This year will not be smooth sailing.”
