How will the March PCE report impact the Fed's interest rate decision?
In March, both headline PCE and core PCE, which excludes volatile food and energy costs, were flat month over month, a slower pace than what was seen in February.
Year over year, headline PCE rose 2.3%, faster than the 2.1% increase economists expected. Core PCE also came in higher than anticipated, at 2.6%.
The data also showed a sharp uptick in consumer spending (+0.7% in March vs 0.1% in February).
"This inflation report, coupled with this morning's disappointing GDP figures, creates significant pressure on the Federal Reserve ahead of next week's crucial policy meeting," says David Hernandez, crypto investment specialist at 21Shares.
Hernandez adds that while markets have priced in no change to interest rates at the next Fed meeting, "today's mixed economic signals introduce fresh uncertainty into the equation."
According to CME FedWatch, futures traders are currently pricing in a 94% chance the FOMC holds rates steady next Wednesday. The odds for a June rate cut are at 60%.
- Karee Venema
The Fed is unlikely to cut interest rates this time
The Federal Reserve is not likely to change rates at its meeting next Wednesday, despite the modest contraction in first-quarter GDP.
Price and wage data through March have been encouraging, but the Fed is concerned that price increases caused by April tariffs may raise inflation expectations. There has been evidence in consumer sentiment surveys of exactly that.
If the economic contraction gets worse, the Fed could cut rates a quarter point at its June 18 meeting, or the one after that, on July 30.
However, that will be determined by how the Fed weighs the balance of risks between a slowing economy and rising inflation.
- David Payne
David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce.
Q1 GDP unexpectedly declines
In its initial estimate of first-quarter gross domestic product (GDP), the Bureau of Economic Analysis said economic growth decreased at an annual rate of 0.3% as imports jumped 41.3%.
If this holds through to the third reading, it will mark the biggest drop in GDP since Q1 2022. Economists expected a 0.4% increase in economic growth.
"The economy weakened in the first quarter," says Bill Adams, chief economist for Comerica Bank. "Businesses and consumers pulled forward purchases to get ahead of tariffs in the first quarter, and throttled back spending and investment plans in other areas."
Adams notes, though, that today's reading doesn't tell us much about the current state of the economy, given all of the announcements and changes that have taken place since the start of the month.
The economist feels the uncertainty will keep the Fed on hold this month, but he says a June rate cut is on the table.
- Karee Venema
With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021, and oversees a wide range of investing coverage, including content focused on equities, fixed income, mutual funds, ETFs, macroeconomics and more.
Can Trump fire Powell?
In addition to upending the global economy with his tariffs, President Donald Trump has introduced additional uncertainty for financial markets by undermining the independence of the Federal Reserve and Fed Chair Jerome Powell in a series of public attacks.
His behavior could render moot whatever the result of a pending Supreme Court review of a 90-year-old case that could answer the question, can Trump fire Powell?
Last week, President Trump called Chair Powell a "major loser" and suggested the Fed cut interest rates last September to help former President Joe Biden.
In Michigan on Tuesday to celebrate the first 100 days of his second administration, the president refreshed his assault.
"Interest rates came down despite the fact that I have a Fed person who's not really doing a good job but I won't say that, I want to be very nice," Trump told his rally crowd.
"I want to be very nice and respectful to the Fed," he continued. "You're not supposed to criticize the Fed, you're supposed to let him do his own thing.
"But," he concluded, "I know much more than he does about interest rates, believe me."
- David Dittman
David is the former managing editor and chief investment strategist of Utility Forecaster and the former editorial director of Investing Daily, Charles Street Research, and Weiss Ratings. A former stockbroker, David has been working in financial media for more than 20 years.