This week the Federal Reserve’s preferred measure of inflation, the PCED or Personal Consumption Expenditures Deflator, fell below 3% for the first time since April of 2021. The PCED peaked at 7.1% in June of 2022, so seeing this key metric begin with a “2” brough relief to both stock and bond markets, which rallied for the week. While it is too early to declare victory over inflation, so far so good. The Federal Reserve’s inflation fighting increase in interest rates, combined with a recession in China, has resulted in falling inflation without a major recession here at home.
The economy appears to be ‘just right’, not too hot so that inflation rises, but not too cold that we see a major recession and job losses. The result has been a continued rally for stocks which were up .77% for the week and up 3.42% for the month of February.
The biggest cause for concern at this point is that too many investors appear to be positive. Rather than the recession fear of 2023, investors are increasingly feeling comfortable that the Fed is done with interest rate increases, the economy is doing fine, and inflation is coming down. Usually, when investors become too comfortable the market is ready for a pullback.
For now, we will enjoy the rally, a welcome relief from the worries of 2023!