Today, the U.S. Federal Reserve just released their May FOMC Meeting Minutes. While headlines picked up that the Federal Reserve is likely to maintain another 50-basis point rate increase at their June meeting, followed potentially by two more 50-basis point increases, many investors’ eyes were drawn to the section specific to the Fed’s PCE estimates, or Personal Consumption Expenditures – “…total PCE price inflation was expected to be 4.3 percent in 2022. PCE price inflation was then expected to step down to 2.5 percent in 2023 and to 2.1 percent in 2024 as supply–demand imbalances in the economy were reduced by slowing aggregate demand and an anticipated easing of supply constraints.”
While this may not seem like a big deal, if their estimation of PCE does prove to be correct for 2022, 2023, and 2024, this mathematically implies that after the next potential 1.50% increase in the Fed Funds Rate, that is where the Federal Reserve would stop raising. All told, if correct, this would increase the Fed Funds Rate to 2.25%, below what the market is currently pricing in. This also doesn’t take into the fact that inflation could slow faster than anticipated as well as the possibility of an economic recession. These events would potentially force the Federal Reserve to pause sooner than even they anticipate, paving the way for an equity and fixed income market rally heading into the back half of the year.