Tic, tac

The Federal Reserve favorite inflation indicator, the PCE was published yesterday and was better than expected with a YoY growth of 2.1%. It core component, shown in the chart below, grew 2.5%. We are at a point where the Fed can justify rate cuts, in its own terms, although they will always say they do not look only at one indicator. The odds for a rate cut in June 18th are basically zero, and for July are almost nill as well. We might get a rate cut in September, but by then, we will have a bigger deficit than today, if the OBBB is approved as is, and the Fed might decide to keep the powder dry, and wait more time to see if government spending produces inflation, which it will. Perhaps the bigger question is if that inflation will be offset by a recession caused by tariffs, and the slowdown in trade. And if private investment, such as AI infrastructure can deliver growth fast enough and meaningful enough to push the GDP out of the red. And it probably won’t. In the meantime, bond yields keep rising and the fiscal bomb keeps ticking.

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