The Federal Reserve breathed a sigh of relief as annual Consumer Price Index (CPI) revisions revealed that core inflation slowed down in the second half of 2023, keeping intact the Fed’s plans for interest rate cuts. The S&P 500 reacted to this news by edging up modestly after closing Thursday at a new record high. The Bureau of Labor Statistics revisions only affected the seasonally adjusted CPI data, and did not change the 3.9% 12-month core inflation rate. However, the recent plunge in core PCE inflation from 4% to 1.9% in the second half of 2023 fueled market expectations of significant Fed rate cuts.
The Federal Reserve rate-cut odds remained relatively low after the revised data, with markets pricing in just 17.5% odds of the first rate cut coming at the March 20 Fed meeting, and 63% odds by May 1. Despite the potential setback to rate-cut expectations, the S&P 500 experienced a slight rise after the CPI revision, signaling that markets were responding to the recent shift in the Fed policy outlook.
The CPI and PCE price index play vital roles in determining the Fed’s inflation rate and the health of the economy. Any bumps or dips in the indices have a significant impact on the decisions taken by the Fed. Now, with the data revisions showing that core inflation figures are remaining steady, the Federal Reserve might just be able to avoid making significant changes to its planned rate cuts.
