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Traders Brace for Key PCE Inflation Data as Fed Signals Policy Path

3 days ago

Market Eyes Fed’s Preferred Inflation Gauge for Policy Clues

The U.S. Bureau of Economic Analysis (BEA) is set to release February’s Personal Consumption Expenditures (PCE) Price Index today, a pivotal data point that could shape the Federal Reserve’s next policy move. As the Fed’s preferred inflation measure, the PCE index carries significant weight in market pricing, with traders closely watching for any deviation from expectations.

At the March FOMC meetingChair Jerome Powell reinforced the Fed’s patient stance, emphasizing that policymakers won’t tighten policy unnecessarily if inflation moderates on its own. However, with core PCE expected to rise 0.3% month-over-month, in line with January’s gain, and the annual reading ticking up to 2.7% from 2.6%, markets remain on edge over the potential trajectory of rate cuts.

Rate Cut Expectations in Focus

The Fed opted to keep interest rates steady at 4.25%-4.50% in March, while its updated Summary of Economic Projections (SEP) signaled a cumulative 50bps rate reduction in 2025. Notably, inflation forecasts for the year were revised higher, with headline PCE expected to hit 2.7% and core PCE climbing to 2.8%, up from December’s 2.5% projection.

Despite these revisions, markets currently price in just a 10% probability of a 25bps rate cut in May, reflecting skepticism over an imminent policy shift. With limited upside potential for the U.S. dollar, traders are increasingly sensitive to any inflation surprises.

Potential Market Reactions

  • Hotter-than-expected inflation (0.4% or higher) → Strengthens the USD, as it could reinforce a higher-for-longer rate outlook.
  • Weaker-than-expected inflation (below 0.2%) → Weakens the USD, likely prompting a larger market reaction as rate cut bets gain momentum.

With the Fed’s next move hinging on inflation dynamics, today’s PCE release is a must-watch for traders navigating the evolving macro landscape.

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