Dow soars nearly 600 points after inflation gauge closely watched by Fed reignites hope for fall rate cut

The Dow jumped nearly 600 points Friday as investors breathed a sigh of relief after the Federal Reserve’s preferred inflation measure met Wall Street’s expectations – reignited optimism for a fall rate cut.

The personal consumption expenditures (PCE) price index increased 0.3% last month, the Commerce Department’s Bureau of Economic Analysis said on Friday, matching the unrevised gain in March.

In the 12 months through April, the PCE price index rose 2.7% after advancing at the same pace in March. Economists polled by Reuters had forecast it would climb 0.3% on the month and 2.7% on a year-on-year basis. 

Friday’s data suggested the elevated pace of price increases could last longer than expected but also the prospect that more tepid consumer spending may keep a lid on prices increases in the months ahead.

“People have been pinched for a while, and it’s likely starting to show … This cooling is encouraging for slower inflation in the coming months,” said Elizabeth Renter, a senior economist at NerdWallet.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased by 0.2%, down from a downwardly revised 0.7% rise in March. AFP via Getty Images

The blue-chip Dow Jones Industrial Average, which had been battered all week after breaking the 40,000 barrier for the first time earlier this month, soared  574.84 on Friday to close at 38,686.32.

Traders of futures tied to the Fed policy rate added to bets of roughly even odds that the central bank will begin to cut rates in September and boosted the odds of a second rate cut in December to about the same probability.

Friday’s report also showed that income growth slowed and spending cooled sharply in April, a trend that could help moderate economic growth and inflation in the coming months and potentially please the Fed.

Fed Chair Jerome Powell has said he expects inflation, after picking up in the first three months of 2024, to resume cooling in the coming months.

Powell has cautioned, though, that the central bank needs “greater confidence” that inflation is sustainably slowing before it would consider cutting rates.

“April is a first step in the right direction, but much work remains,” said Stephen Stanley, chief US economist at Santander, an investment bank.

Stripping out the volatile food and energy components, the PCE price index increased 0.2% in April after rising by 0.3% in March. 

Core inflation increased 2.8% on a year-on-year basis in April, matching March’s advance. 

Gas prices jumped 2.7%, while grocery prices eased last month, according to Friday’s report, though they’re still up significantly from before the pandemic. 

The prices of long-lasting goods also dropped, led by less expensive new and used cars, furniture and appliances. 

The cost of used cars has declined nearly 5% over the past year.

The cost of goods was up 0.2% while services were 0.3% more expensive.

Fed Chair Jerome Powell
Traders of futures tied to the Fed policy rate maintained bets of roughly even odds that the central bank will begin to cut rates in September. Fed Chair Jerome Powell, above. AFP via Getty Images

Restaurant meals, for example, increased 0.3% from March to April and are up 4% from a year earlier. 

Entertainment prices, including for movies and concerts, jumped 7.4% from 12 months earlier.

Dan North, senior economist for Allianz Trade, said the numbers were not impressive.

“The core index came in at 2.8%. That’s fine, but it’s been trading in a range for five months now, and that’s pretty sticky to me,” North told CNBC.

“If I’m [Fed Chair Jerome] Powell, I’d like to see that start moving down, and it’s barely creeping. … I’m not reaching for the Pepto yet, but I’m not feeling great. This is not what you want to see.”

One influential Fed official, John Williams, president of the Federal Reserve Bank of New York, said Thursday that he expects inflation to start cooling again in the second half of the year. 

Until it does, though, Powell has made clear that the central bank is prepared to keep its key rate pegged between 5.25% and 5.50%, its highest level in 23 years.

The Fed has raised borrowing costs by 525 basis points since March 2022 in a bid to cool demand across the economy.

Financial markets initially expected the first rate cut to come in March, which then got pushed back to June and now to September.

With Post wires

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