Fed finds itself in 'really good spot' on cooling PCE

The Consumer Price Expenditures (PCE) Index — the Federal Reserve's top inflation measuring tool — cooled in December, with headline and core PCE data rising below 3% year-over-year and closer to the Fed's 2% target. Is this positive print enough to push Fed officials to initiate interest rate cuts?

Penn Mutual Asset Management Portfolio Manager George Cippolloni to discuss the Fed's new position on inflation.

Thinking back "where we were a few months ago... there was a palpable sense of fear that we were going to go through 5%. Well, those days are over," Cippolloni tells Yahoo Finance. "And fortunately now with the inflation pulling back, the Fed has room, I think there is about 125 basis points of cuts priced in for 2024. Coin flip whether it is going to be March or May in terms of the start, but they are in a really, really good spot and so far, so good for the Fed.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JULIE HYMAN: Well, now that Jerome Powell's most-talked-about piece of economic data has moved below 3%, are better days ahead for the fight against inflation? Our first guest today thinks that rates are still in the driver's seat when it comes to equity returns. George Cippolloni Penn Mutual Asset Management portfolio manager, is joining us right now. Hey, George. Good to see you.

So what are you thinking at this point about whether the Fed has been successful and whether we are going to see inflation come back down and then it able to start to cut rates?

GEORGE CIPPOLLONI: Hey, Julie and Josh. Great to see you both.

So I think the great thing for the Fed right now is that PCE has come back so much, and now there's a huge gap between the PCE and the fed funds rate. And so we can equate that to a relief of pressure and really a lot of room for the Fed to start cutting, which is exactly what they wanted to see.

And if we just think back where we were a few months ago, we had the 10-year at 5%. Financial conditions were tightening, and there was a palpable sense of fear that we were going to go through 5%. Well, those days are over, and fortunately now with inflation pulling back, again, the Fed has room. I think there's about 125 basis points worth of cuts priced in for 2024. Coin flip whether it's going to be March or May in terms of the start, but they are in a really, really good spot, and so far, so good for the Fed.

JOSH LIPTON: What about, George-- I don't know if you heard. Julie and I, we were talking about this, and there are some economists, George, who are a bit skeptical. They like what they see in terms of the trajectory of inflation, George, but they're kind of saying, you know what? Let's not break out the party balloons just yet because that last mile, George, they think to get really back to 2% and stick there they think might be a little tougher than maybe some expect. What do you think?

GEORGE CIPPOLLONI: I think that's a fair point because if you look at history, it hasn't just been down and done. Usually there are these bumps back up in inflation, and so I think that's what we have to watch out for.

Obviously once the Fed starts to cut, you know, we tend to see the animal spirits get back into the markets, and we are seeing that, especially if you look at the P/E of the S&P overall up 40% over the last few months. And so that's what you have to watch out for.

I like to watch for mainly energy and oil prices. Gasoline is a big number that I tend to watch. And if you see a bump up there, then you might start to get worried about inflation working back in. But again, so far, so good.

I do agree. I think that last mile is going to be a lot tougher than what we've had to overcome so far. And yeah, we'll see. I have a feeling we'll be rangebound for Treasury yields for the rest of the year. That's what it feels like, at least at this point. Off of 5%, maybe a little higher than 4%, and that's where we are right now.

JULIE HYMAN: And so what are the implications then for stocks also, George?

GEORGE CIPPOLLONI: Sure. So lots of implications, obviously. I think one of the things-- obviously everybody looks at the big picture. They all look at the indexes. Underneath the indexes, underneath the big tech names, as we are all looking at in amazement, we're seeing a lot of weakness throughout, you know, if you look at some small caps, even if you look at some big caps that reported some surprising results.

So on an individual basis, you know, you have to watch out for the 3Ms of the world and the Intels and even Humana that reported yesterday-- Tesla. They were all down about 10%. We don't hear much about that because the broad indexes are still really strong.

But I love divergences. As a bottom-up stock picker, I think that gives us a ton of opportunity to add value. Small caps look cheap. International ADRs look really cheap relative to the US. And so from my standpoint, I really like to see those types of divergences.

From a broad stock market index, growth needs to come through. You mentioned the big tech names are going to report next week. They need to follow through with the growth that they have given us so far.