The strong reaction to the January CPI data demonstrates that markets still don’t fully comprehend that the Fed is focused on the alternative PCE measure of inflation. While core CPI inflation was unchanged at 3.9% last month, we estimate that core PCE inflation fell to only 2.7% and it remains on track to hit the 2% target by May. Since Fed officials have repeatedly said they will begin loosening policy before the PCE measure returns to target, that suggests the odds of a May rate cut are higher than the less than 50% probability now implied by fed funds futures.
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