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Investing.com -- Upcoming data on the Fed's preferred inflation gauge for April due Friday is set to grab all the headlines, and drive fresh speculation on the future path for interest rates but it will take more than just an in-line print to revived hopes of sooner rate cuts.
The core price consumption index is expected to have slowed to a pace of 0.3% in April from 0.32% a month earlier, but it "wouldn't be enough of a decline to start the clock ticking toward a rate cut," Macquarie said in a Thursday note.
Hopes of sooner rate cut, however, could be revived if the data show core PCE inflation more consistent with 2.5% inflation, or sequential figures closer to 0.2%, it added.
The data are set to be released against a slew of recent hawkish remarks from Fed officials that have flagged uncertainty about whether the current level of monetary policy is restricting the economy and inflation.
This uncertainty has fueled strong debate on whether the neutral rate, or R*, one that neither boosts nor curbs economic growth is higher than the current 2.5% rate.
"They [traders] suspect that it will keep the policy rate higher than otherwise into the 2nd half of the decade," Macquarie said.
In a Bloomberg opinion piece on Thursday, former New York Fed President Bill Dudley reiterated this concern. “I think r* is a lot higher than the Fed recognizes – which means the central bank isn’t doing enough to fight inflation,” Dudley said.
Still, most Fed officials have pushed back against the prospect of hike, with current New York Fed president saying monetary policy was "well positioned" to continue to curb inflation.
The odds of rate cut later this year remains evenly balance, with about 46% of traders expecting a first rate cut by September.
"Four more CPI reports will be available by the September meeting, and if monthly core CPI inflation averages in the high 20s and core PCE in the low 20s, as we expect, then we think most FOMC participants will support a rate cut," Goldman Sachs said in a recent note after pushing back its forecast for a rate cut to September from July.