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The latest inflation report reveals that consumer prices in the United States reached their highest level in nearly three years in April. The Personal Consumption Expenditures (PCE) price index, which the Federal Reserve prefers for measuring inflation, rose by an annual rate of 3.8%. This marks an increase from 3.5% in March and 2.8% in February. The report is the first since Kevin Warsh was sworn in as the new Fed chairman.
According to Morningstar, economists expect the Federal Reserve to consider a hawkish stance by the end of the year. The PCE index, driven by rising energy costs, is expected to show a 3.9% year-over-year increase, surpassing the Fed's 2% target. Core PCE, which excludes food and energy prices, is projected to rise 0.3% from March and 3.3% annually.
Kraken's Economic Brief highlights that the Federal Reserve's minutes from April 28–29 indicate a decision to hold the federal funds target range at 3.50%–3.75%, with inflation remaining elevated due to global energy prices. Warsh's first Federal Open Market Committee (FOMC) meeting is scheduled for June 16–17.
During his confirmation hearing, Warsh expressed skepticism about the PCE index, describing it as a "rough swag" on inflation. He favors "trimmed" gauges, such as the Dallas Fed's trimmed mean PCE and the Cleveland Fed's median PCE, which offer a different perspective on inflation trends. Charles Schwab reports that these trimmed gauges remain at or near multi-year lows, contrasting with the PCE's multi-year highs.
Looking ahead, markets expect the Fed to maintain the current rate range in the near term, but there is a growing expectation of a rate hike by the end of 2026. As of May 26, over 99% of bond traders anticipate the rate staying within its current range at the Fed's next meeting in mid-June, according to the CME FedWatch Tool.