New Inflation Data to Help Shape Rate OutlookNewInflationDatatoHelpShapeRateOutlook

New inflation data will give investors a fresh look at the state of the economy and the outlook for rates on Friday. The core personal consumption expenditures (PCE) price index, which excludes food and energy, is forecast to have risen 4.7% year-over-year in February, matching the previous month’s reading. While it serves as the Federal Reserve’s primary inflation gauge, the PCE index will be placed into a bigger basket of economic signals that policymakers will consider between now and their next meeting in May. One such signal will be credit conditions and their impact on economic activity, especially considering how regional banks play a central role in small business lending.

Rate expectations have mounted a sharp reversal since the onset of the bank crisis. Interest rate futures, coupled with a fall in short-term Treasury yields, show that market participants foresee the Fed delivering rate cuts later this year. Those bets have not changed much despite the Fed’s insistence last week that it was not considering cutting rates—at least for now. Interest rate futures are pricing in rate cuts as early as July, reflecting the market’s view that the Fed will need to take a more accommodative policy stance in support of a slowing economy and to reduce risks to the financial system. The market is largely split on whether the Fed will forgo a hike in May or proceed with another quarter-point increase. PGIM Fixed Income’s Weekly View from the Desk examines the global effects of credit tightening, how the economy weathered past financial crises, and the impact that recent stress on the banking system will have on rates.