Morgan Stanley’s Chief US Economist, Michael Gapen, offered insights on the latest Personal Consumption Expenditures (PCE) report and its implications for future Federal Reserve policy. In a recent interview, Gapen characterized the 0.1% increase in PCE as “very favorable,” highlighting the decline in housing-related inflation as a key driver.
Gapen acknowledged the persistent stickiness in goods prices, particularly for cars, attributing it to storm-related disruptions. However, he emphasized the overall downward trend in inflation, echoing the views of Federal Reserve Presidents Goolsbee and Williams. While cautioning that the path to disinflation will be bumpy, he sees clear signs of progress.
Looking ahead, Gapen anticipates a similar PCE reading for December, potentially slightly higher at around 0.2%, but still consistent with a trajectory toward the Fed’s 2% inflation target. He noted that January typically experiences higher-than-normal inflation due to seasonal factors.
Addressing the market’s reaction to the Fed’s recent decision to hold interest rates steady, Gapen suggested Wednesday’s market movements may have been an overreaction. He pointed out that the Fed still anticipates future rate cuts, with the average Fed official projecting a neutral rate of 3%, implying further room for easing.
Gapen emphasized the importance of Fed Chair Powell’s comments about the current monetary policy stance being “meaningfully restrictive” but “a lot less restrictive than we were.” He highlighted the Fed’s tolerance for inflation, as evidenced by their projections, which don’t foresee reaching the 2% target until 2027. This suggests a prioritization of maintaining a strong labor market.
Gapen concluded that while the Fed appeared hawkish in its recent decision, a dovish pivot remains possible if economic activity slows, inflation continues to decline, and labor markets soften.
