MINNEAPOLIS (June 8, 2023) — Inflation is cooling, but overall prices are still rising at an elevated pace that will likely require the Federal Reserve to keep rates elevated for longer than markets had hoped.
Both retail sales and overall personal consumption expenditures in April rebounded from weak readings in the previous two months, while the leading economic indicators declined for the 13th consecutive month and are now at the lowest level since September 2020. Historically, such a string of declining readings has only happened when the economy is in or near a recession.
We received the second estimate of the first quarter 2023 real GDP, and it was revised up to 1.3% annualized from 1.1%. Of note, gross domestic income (GDI) for the first quarter of this year was released at the same time. It showed a decline of 2.3% annualized, following a 3.3% decline in the fourth quarter of 2022. Over the long term, the two measures track each other but often at turning points in the economy; the GDI will provide an early warning. At the very least, the two measures indicate that the economy is slowing.
Barring a surprisingly strong CPI report for May, the Fed is expected to hold the target range for federal funds at the current level and wait for the July meeting to determine if another rate hike is warranted. The expected pause in interest rate hikes comes after 10 consecutive Fed meetings in which the federal funds rate has been increased by a total of 500 basis points.