The Fed's preferred measure of inflation, the core PCE index, registered a 5.2% increase YoY. This figure slightly moderates from the 5.3% a month ago, the highest reading since April 1983. Nevertheless, the Fed will still be concerned with controlling inflation, given that its price target is an average rate of 2%. Therefore, next week Wednesday, 5th May, the Fed is expected to hike rates by 50bps. Moreover, the central bank is aggressively looking to front-load its rate increases in the coming months.
The GDP miss yesterday has introduced complications, although the Fed would not be overly concerned at this stage. First, we note that the advanced GDP print showed a contraction of -1.4% instead of the forecasted expansion of 1.1%. The forecast, in itself, was much lower than the 6.9% reported previously. High inflation with growth contraction is a symptom of stagflation. If this exacerbates, the aggressive hawkishness may hurt growth far more than initially expected. However, the Fed will view this as the lesser evil at this stage.
This disregard is because Fed will be concerned with another data point released today, the employment cost index, which is up 4.5% YoY. Employees are asking for higher wages to keep up with rising costs. Employers, in turn, are comfortable passing on rising costs to consumers. Yet, frighteningly, compensation costs have not kept up with inflation on a real basis. Therefore, the Fed needs to reverse this trend before it spirals out of control, as a matter of urgency.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.