Personal income, spending data will allow Fed to stay on hold

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Inflation took a step back, according to the Federal Reserve’s favorite indicator, while income edged up in March, ahead of this week’s Federal Open Market Committee meeting, suggesting the Fed will be able to remain patient on rates.

Year-over-year core personal consumption expenditures dipped to a 1.6% gain in March, the lowest since January 2018, the Commerce Department reported Monday.

Also in the report, spending rose 0.9% in the month, its biggest single-month growth since August 2009. Purchases make up more than two-thirds of economic activity.

“Looking forward, we expect consumer spending to pick up from the first quarter and that bond yields will begin to slowly rise and steepen the yield curve again,” according to Bryce Doty, senior portfolio manager at Sit Fixed Income. “We would be surprised if the yield curve was still inverted by year end.”

The Federal Open Market Committee meets this week, with a statement to be released Wednesday afternoon. The target range will remain unchanged at 2.25%-2.50%, according to Morgan Stanley researchers. In the post-meeting press conference, Chair Jerome Powell may comment, or be asked about, softness in inflation, the underlying strength in the economy, and financial stability, they said. He may also shed light on balance sheet matters including its composition going forward.

"The Fed's decision to remain on hold is justified by the receding core inflation and inflation expectations that are at all-time lows," wrote Berenberg Chief Economist Mickey Levy, and U.S. Economist Roiana Reid. "Headline PCE inflation has now been below 2% for 83% of the monthly observations since the Fed set its 2% target in January 2012 and core PCE inflation has been below 2% for 89% of the time. These trends are sure to intensify the discussions around the symmetry of the Fed's 2% inflation target as the Fed pursues a broader rethink of its monetary policy strategy this year."

Also released Monday, the Texas Manufacturing Outlook Survey showed activity expanded and expectations improved slightly in April. “Some uncertainty remains, though, and a special question posed this month on drivers of that uncertainty showed that trade negotiations and tariffs, the political climate, and labor constraints were at the forefront of firms’ minds,” according to Emily Kerr, Dallas Fed senior business economist.

The employment index dropped to its lowest level since late 2016, while hours worked climbed in the month. Raw materials prices fell to their lowest level in three years, while the finished goods prices index was steady. Wages and benefits index dipped, but remained at an elevated level.

The Treasury Department announced it will borrow $30 billion in the second quarter and end the period with a $270 billion cash balance. Three months ago, Treasury projected $83 billion in borrowing with a quarter-end balance of $300 billion.

Treasury expects to borrow $160 billion in the third quarter, ending with an $85 billion cash balance.

Treasury borrowed $347 billion in the first quarter and finished with a $334 billion cash balance.

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Economic indicators Treasurys Treasury bonds Monetary policy Federal Reserve FOMC