The U.S. is set to release the April Personal Consumption Expenditures (PCE) Price Index tonight — the Federal Reserve’s preferred inflation gauge — and it may prove pivotal in determining whether interest rate cuts remain on the table this year.
According to market forecasts, the headline PCE is expected to rise just 0.1% month-on-month, with year-on-year inflation dipping from 2.3% to 2.2%, approaching pre-pandemic levels.
However, the core PCE index — which strips out food and energy volatility — is forecast to rise 0.1% MoM, but remain sticky at 2.6% YoY, a level well above the Fed’s 2% target.
Fed’s Rate Cut Window May Be Closing
Despite previous optimism among Fed officials, the six-month streak of core PCE hovering between 2.6% and 2.8% is becoming a major concern. Analysts now warn that the window for Federal Reserve rate cuts is narrowing rapidly.
Complicating the outlook are the lingering inflationary effects from Trump-era tariffs, which are beginning to filter through the U.S. economy. Economists suggest that even if some tariffs are relaxed, inflation could rebound to 3% within months, reigniting policy tightening risks.
Market Expectations Shift Dramatically
Investor sentiment has shifted swiftly in recent days. The CME FedWatch Tool shows that rate cut expectations for September have plunged from 68% a week ago to just 47% today, reflecting skepticism over a dovish pivot.
“The Fed may find itself stuck between persistent inflation and political pressure,” said one macro strategist. “The data tonight could be make-or-break for the market’s dovish hopes.”
What to Watch
Headline PCE YoY: Expected at 2.2%
Core PCE YoY: Expected to hold at 2.6%
Market Impact: A print above expectations could fuel bond selloffs, strengthen the dollar, and weigh on risk assets including crypto. A downside surprise could revive hopes of a September rate cut.