With the April Personal Consumption Expenditures (PCE) report due Friday ahead of “X-date” next week, fears of a stock market crash are flying high. What’s happening in the economy lately?
Well, this week’s PCE report has something of a different feel to it. Typically, the importance of the PCE lies in the monetary implication. Indeed, the Federal Reserve-preferred inflation gauge has, for most of the past year and a half or so, informed the Fed’s rate hike decisions. Time and time again, it seemed the central bank used the frequently stubborn inflation readings to justify continuously raising the benchmark rate, the fastest pace of rate hikes in more than 60 years.
This time around, though, the PCE report is almost something of a distraction. With just days until the Treasury runs out of money — effectively forcing the country to default on its debt — there’s little-to-no chance this week’s PCE results in a near-term rate hike, almost regardless of how much inflation did or did not ease. Inflation is no longer the star of the show.
Still, that doesn’t necessarily mean interest rates won’t go up. If lawmakers fail to raise the debt cap before the projected June 1 default date, interest rates will skyrocket across the board as credit rating agencies downgrade the U.S. credit rating. While this may in fact lower inflation as a result of lower demand, it would also invite a nasty potential recession, likely facilitated by the Fed’s previous rate hikes.
With that in mind, what should you expect at this Friday’s rate hike?
Stock Market Crash Fears Run Hot Ahead of April PCE Report
In a strange way, rising inflation could be considered a positive thing should the U.S. default on its debt. The PCE informs the level of U.S. spending as much as it tells us about the price level. If the U.S. defaults and interest rates inevitably skyrocket, it would generally be better for demand to be stronger before such a black swan, to curb the impact of a default-induced recession.
Now, this scenario runs the assumption that the country will default which, just to be clear, is in no way the base case. Lawmakers have raised the debt ceiling at the 11th hour plenty of times in the past.
Still, the nightmare situation remains a default-fueled recession, enhanced by crushed consumer spending and aided by previous rate hikes.
According to the Cleveland Fed’s Inflation Nowcasting tool, inflation (as measured by the PCE) is expected to have climbed about 0.19% from April to May, representing a 3.85% annual increase. Should this hold true, it would be one of the smallest increases in price since the Fed began its rate hike efforts. If you recall, inflation came in at 4.2% at the March meeting, a notable improvement from the 5%-plus readings from the three months prior.
While less inflation is generally good, if it comes off the back of reduced consumer spending — especially with a recession in the rear view — the implications aren’t quite so clear cut.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.