For the Bitcoin and crypto markets, today’s release of the Core Personal Consumption Expenditure (PCE) index in the United States has been the most important event of the week. The starting point was simple: if the numbers released by the Bureau of Economic Analysis (BEA) were better than expected, Bitcoin and other risk assets could see a renewed rally.
At the same time, however, there was a risk that the numbers – like the Consumer Price Index (CPI) for January – would be worse than estimates suggested. In this case, analysts agree that it will support the U.S. Federal Reserve (Fed) in its interest rate policy, aiming for higher and longer.
Bitcoin Price Drops As Core PCE Comes In Hot
The most important thing about the PCE inflation data is that the releases lag the CPI releases by two to three weeks and the PCE tracks the CPI very closely. For this reason, the PCE data usually barely moves the market, even though it is the Fed’s preferred inflation measure.
This time, however, the market was watching closely after the January CPI delivered a bad surprise. Prior to the release, estimates suggested that core PCE inflation would rise 0.4% month-over-month, slightly faster than the 0.3% rise reported for December 2022.
The annualized core PCE price index for January was forecast at 4.3%, slightly lower than the 4.4% reported in December 2022.
The figures just reported by the Bureau of Economic Analysis are worse than expected – a bad surprise (again). Core PCE comes in hot +0.6% month-over-month, versus +0.4% expected. The year-over-year figure comes in at +4.7%, expected was +4.3%. The other data, which were published as well, looks just as bad.
US Personal Income +0.6% In Jan; Consensus +1.2%
US Personal Spending +1.8% In Jan; Consensus +1.4%
Jan PCE Core Price Index +0.6% Rate On Mo; +4.7% On Yr
Jan PCE Price Index +0.6% Rate On Mo; +5.4% On Yr
Dec Personal Income Revised To +0.3% From +0.2%
— *Walter Bloomberg (@DeItaone) February 24, 2023
Implications For The Next Fed Meeting
Today’s PCE release is likely to have a significant impact on the Fed’s next FOMC meeting, which will be held on March 21-22, 2023. Fed Chairman Jerome Powell didn’t get tired of emphasizing during recent FOMC press conferences that the interest rate decisions are dependent on data.
The Core PCE is the Fed’s preferred metric because the PCE is more flexible than the CPI as it adjusts to changes in consumer spending habits. The CPI, on the other hand, is less flexible and does not take into account changes in consumption patterns.
Another advantage of the PCE is that while the CPI uses a fixed basket of goods method (the weighting is updated annually since 2023), the PCE is using a chain index method, which allows changes in consumption habits to be taken into account in a more timely manner.
The fact that the PCE came in worse than expected is likely to strengthen the faction within the Fed calling for a 50 basis point (bps) rate hike. Cleveland Fed President Loretta Mester said last week that he had seen a “compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5%.”
FED'S MESTER: AT THE MOST RECENT MEETING, REPEATS SAW A STRONG CASE FOR 50 BPS.
— Breaking Market News (@financialjuice) February 24, 2023
On the other hand, the Fed could also follow through on its “higher for longer” strategy with at least three 25 bps hikes. With the U.S. labor market still strong, Goldman Sachs expressed that the Fed will raise rates by 25 bps at each of the March, May and June meetings. As NewsBTC reported yesterday, this should also take a rate cut in 2023 off the table.
Bitcoin reacted accordingly and recorded a slight drop. At press time, the BTC price was trading at $23,789. For Bitcoin bulls, the task now is to defend the recent lows and ultimately the crucial support at $23,300.