Credit Agricole on US PCE & FOMC - FJElite

May PCE data will be a highlight tomorrow, where our economists expect an increase in both headline and core to 4.1% and 3.4%, respectively. PCE inflation has been relatively sticky, a trend likely to persist near term given high energy prices. Specifically, in our house forecast, headline PCE rises 0.5% MoM with the YoY pace accelerating to 4.1% from 3.8%, driven largely by energy, while core rises 0.3% MoM, with the YoY pace edging up to 3.4% from 3.3%.

Rising PCE is consistent with the Fed forecast. The FOMC's June Summary of Economic Projections (SEP) released last week forecast higher inflation, with core PCE up to 3.3% this year vs 2.7% in the March forecast. Inflation framework is one of the five task forces that Fed Chair Kevin Warsh has set up to reform how the Fed conducts monetary policy after inflation has overshot the 2% target for five consecutive years.

As Warsh emphasised the FOMC’s commitment to price stability, the market has projected a hawkish Fed rate path, with one 25bp rate hike fully priced by the autumn and total 45bp tightening by H127 in futures pricing.