Fed’s favorite inflation gauge jumps again, increasing pressure on Warsh

The Federal Reserve is once again in the “inflation ring” as its preferred price gauge rose to its highest level in almost a year, dealing a major blow to market expectations for an imminent interest rate cut.

This is the warning from Nigel Green, CEO of
Deavere GroupPCE inflation rose to 3.8% in April, the highest since May 2023, while core PCE climbed to 3.3%, its strongest reading since October last year.

Both measures are now well above the Fed’s 2% target and come at a pivotal moment for newly installed Fed Chairman Kevin Wersh.

The CEO says: “The Federal Reserve faces a brutal policy reality as inflation surges.

“The inflation story has changed again and the Fed cannot ignore it.

“The market spent months convincing itself that a rate cut was inevitable. Inflation data like this destroy that argument.

“3.8% is nowhere close to the target. Core inflation above 3% confirms that price pressures are spreading deeply throughout the economy.”

The latest figures come as energy prices are rising due to rising geopolitical tensions involving Iran, while resilient consumer spending, increased wage growth and massive investment in AI and technology are boosting demand in the US economy.

Treasury yields moved higher shortly after the inflation data as investors raised expectations for accommodative monetary policy.

Nigel Green says investors are underestimating how aggressively the Fed may need to respond now.

“The market has become accustomed to the idea of ​​easy money back quickly. Inflation is now telling policymakers the opposite.

“Kevin Wersh takes over the Fed at one of the most dangerous moments for the central bank’s credibility in years.

“He inherited stubborn inflation, volatile energy markets, political pressure from the White House, and financial markets demanding rate cuts the data no longer supports.”

Warsh has repeatedly argued in recent years that the Federal Reserve waited too long to confront inflation after the pandemic and allowed price pressures to build throughout the economy. He has also publicly supported a tough stance on inflation and tight monetary discipline.

Those positions now leave the new Fed chair little room to soften his approach.

“Warshaw built his credibility by criticizing the Fed for lagging behind on inflation. He can’t come in as chairman and suddenly do the slack if inflation rises again.

“If the Fed hesitates now, the market will conclude that policymakers are unwilling to tolerate structurally higher inflation. Central banks cannot afford that perception.”

Federal Reserve officials are already signaling growing concern. Governor Lisa Cook said this week that she would support further rate hikes if inflation does not subside, underscoring how quickly the policy debate is shifting toward tightening.

Nigel Green says the chances of another rate rise are now firmly back in place.

“A few months ago investors were debating how much the Fed would cut in 2026. Now policymakers are openly discussing whether rates might need to move up again. This is a dramatic reassessment of reality.

“Risk assets have spent many years operating under the assumption that the Fed will always step in with easy policy. Inflation at these levels changes the entire investment backdrop.”

He continues: “Donald Trump wants low rates, Wall Street wants low rates, and consumers want relief from borrowing costs. But none of these pressures change the inflation data facing the Fed.”

“Warsh has consistently defended the Fed’s independence. Markets are now about to find out if he’s willing to prove it.”

Nigel Green concludes that the central bank is increasingly likely to keep rates higher for longer than the market currently expects as officials attempt to prevent inflation from spreading again throughout the economy.

“The Fed has already lost control of inflation once this decade. Policymakers know the consequences of making the same mistake twice.”

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