70% Chance of June Fed Cut as PCE Matches Expectations

The core personal consumption expenditures (PCE) price index, which excludes food and energy, rose 0.3% in January from the previous month. On a year-over-year basis, it increased 2.6%, marking the smallest annual gain since early 2021, according to newly released data.

Consumer Spending Drops Sharply

Inflation-adjusted consumer spending fell 0.5%, registering the largest monthly decline in nearly four years. The drop followed a strong holiday season and was exacerbated by severe winter weather. A significant decline in motor vehicle purchases drove the weakness, while spending on services also slowed.

Income Growth Surprises, but Savings Surge

Elsewhere in the report, personal income saw a much stronger-than-expected increase of 0.9% for the month, far exceeding the forecasted 0.4% gain. However, higher income did not translate into more spending, as personal consumption fell 0.2%, contrary to expectations of a 0.1% increase.

The personal savings rate spiked to 4.6%, indicating that consumers are choosing to save rather than spend, despite rising incomes.

Market Implications

Looking ahead, it remains uncertain how ongoing price pressures and aggressive policy shifts, including new tariffs on imports, will impact consumer behavior. While utility spending increased due to cold weather, overall services spending remained sluggish in January.

Following the report, futures markets increased the probability of a June Fed rate cut, with the CME FedWatch Tool now showing odds just above 70%. Markets currently anticipate two rate cuts by year-end.

Analyst Views

According to Bloomberg Economics strategists Stuart Paul, Eliza Winger, and Estelle Ou, labor income growth has been cooling, which could be a headwind for future personal income growth. However, inflation continues to trend toward the Fed's 2% target, and weaker consumer spending further supports the case for a rate cut.

The analysts expect February's payroll data (due March 7) to be weak, reinforcing the economic trajectory toward an eventual Fed rate cut once the current rate pause ends.