Following higher-than-expected inflation in January, Comerica Bank expects the Federal Reserve will raise the target rate a quarter percentage point at each of the three upcoming decisions to a range of 5.25% to 5.50% in June, and hold rates at that level until March 2024 when they begin to slowly cut rates.
Headline and core PCE inflation rose by 0.6% in January, above consensus expectations for a 0.4% increase of both measures. With upward revisions to inflation in late 2022, year-over-year headline and core PCE inflation accelerated unexpectedly to 5.4% and 4.7%, from 5.0% and 4.4% respective increases in the prior report—which were revised up to 5.3% and 4.6% respective increases in the latest data.
January’s higher-than-expected inflation prints will compel the Federal Reserve to raise interest rates more than it anticipated in December.
Minutes from the Fed’s Feb. 1 meeting show that while the vote to raise interest rates by a quarter percentage point was unanimous, some meeting participants would have preferred a 0.50 percentage point hike. FOMC policymakers reiterated “ongoing” rate increases are needed to make monetary policy “sufficiently restrictive” to slow inflation to the 2% target.
Fourth quarter real GDP growth was revised down to 2.7% seasonally adjusted and annualized in the second estimate from 2.9% in the first; annual GDP was unrevised after rounding at 2.1%.
Goods spending in the fourth quarter was revised lower; for the year as a whole, services spending accounted for all the growth. Nonresidential business fixed investment in the fourth quarter was revised up to a solid 3.3% from 0.7%.
After the revisions, growth in the fourth quarter was still predominantly from a build in inventories and smaller trade deficit. Inflation was revised up in the latest GDP reading, but was still slower than in the third quarter.
Bill Adams is senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.
