PCE hits a new 40-year high: ‘Fed’s willing to risk a deeper recession’

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S&P 500 closed over 1.0% up on Friday even after the PCE Price Index – an inflation gauge that the Fed prefers climbed to a new forty-year high.

PCE Price Index jumps to 6.8% in June

A 6.8% YoY gain in June, as per the Bureau of Economic Analysis, was the broadest seen since January 1982. Versus the prior month, the index was up 1.0%.

Reacting to the report on CNBC’s “The Exchange”, Diane Swonk (Chief Economist at KPMG) said the Fed should continue to tighten even if inflation starts to cool off in the coming months.

Will it cool enough to not become more entrenched? Fed wants to avert that mistake of the 1960s and 70s that delivered us the stagflation by not going far enough to detail the inflation.

Core PCE (excluding food and energy) was up 4.8% YoY beating the Dow Jones estimates by 0.1%.  

Fed could continue to raise rates into 2023

The U.S. economy is now in a “technical” recession that’s adding to the ongoing debate around “rate cuts” by early 2023. Swonk, though, does not see such a possibility.

I think Fed’s going to be raising rates into 2023 and then holding them to see how far that gets them. If they need to go further, they’ll go further. This is a Fed that’s willing to risk a deeper recession.

Earlier this week, Chair Jerome Powell lifted rates by 75 basis points and signalled another hike of that magnitude in September remains on the table as the labour market continues to be “tight”.

Nonetheless, U.S. equities are now up more than 10% from their year-to-date low.

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