According to the latest report released by the U.S. Bureau of Economic Analysis on May 28 local time, the Federal Reserve's preferred inflation gauge—the PCE price index—rose 3.8% year-on-year in April, while the core PCE rose 3.3% year-on-year, both in line with expectations but reaching multi-month highs. Rising oil prices were the main driver, and the increase in core inflation indicates that price pressures are spreading to a wider range of areas.

Federal Reserve officials generally believe that inflation is heading in the wrong direction, but most still prefer to keep interest rates unchanged, while not ruling out the possibility of raising rates if inflation persists.

Waller and other previously dovish members have turned hawkish, and market pricing indicates a roughly 50% probability of a rate hike this year. The 2-year Treasury yield remains around 4%, 25 basis points above the upper limit of the Fed's target range.

PCE data hit a new high, with more price pressure looming.

The Federal Reserve's preferred inflation gauge surged to a three-year high in April. The PCE price index rose 3.8% year-on-year in April, up from 3.5% in March; core PCE rose 3.3% year-on-year, a two-and-a-half-year high, also up from 3.2% in March. Both figures met market expectations.

But more price pressures may be on the way. RSM Chief Economist Joe Brusueras warned, "Given the pricing dynamics in May, we haven't yet seen a peak in either overall or core inflation." He stated that the rise in core inflation is unlikely to reverse in the short term, let alone return to the near 2% target level. New York Fed President Williams also expects inflation to remain high in the coming months, with overall inflation around 4%, but he believes overall inflation may peak in the coming months and emphasized that "policy is well-positioned" to address the conflict with Iran.

Goldman Sachs Chief Operating Officer John Waldron stated bluntly: "Inflation is the biggest risk factor, and it is my personal biggest concern."

Hawkish voices are growing within the Federal Reserve, but not raising interest rates remains the benchmark.

Despite the worrying data, most Federal Reserve officials still favor keeping interest rates unchanged. Williams explicitly stated his support for maintaining the current rate. However, a growing number of voices are not ruling out the possibility of raising rates if inflation persists.

Musalaim said on Thursday that the current real policy rate remains below the neutral rate, inflation is "significantly above" the 2% target, long-term inflation expectations are "gradually rising," and the labor market remains stable. Against this backdrop, he believes that "placing hopes for suppressing inflation on the yet-to-be-realized productivity prospects of AI would be a risky move."

In a speech on Wednesday, Federal Reserve Governor Tim Cook said she is closely monitoring the risks of businesses embedding energy costs into pricing and workers incorporating them into wage negotiations, and made it clear that she is “prepared to raise interest rates” should inflation fail to fall “in time.” Her remarks followed comments from Governor Waller, who said last Friday he preferred to keep interest rates unchanged in the short term but did not rule out the possibility of raising rates if inflation fails to fall.

It's worth noting that Waller, once one of the most dovish members and a supporter of rate cuts, now says inflation is his greater concern. He has joined four other members (Collins of the Boston Fed, Logan of the Dallas Fed, Kashkari of the Minneapolis Fed, and Hammark of the Cleveland Fed) in a call to revise the wording of the policy statement to reflect that the next move is likely a rate hike rather than a rate cut. Fed Vice Chairman Jefferson is relatively dovish, expecting inflation to fall later this year, but acknowledging that risks are skewed to the upside and monitoring whether energy prices are beginning to dampen consumer spending.

Consumers are under pressure, and market pricing suggests one interest rate hike this year.

The impact of high prices is becoming apparent in the real economy. The savings rate fell to 2.6% in April from 3.2%. Morgan Stanley's chief economic strategist, Turner, said, "Rising prices are significantly eroding consumption, and consumers are using their savings to make ends meet."

In the market, the 2-year Treasury yield remained around 4% this week, 25 basis points above the upper limit of the Fed's target range of 3.5%-3.75%, indicating that the bond market is pricing in a rate hike this year. RSM's Bruzuelas summarized, "If the Middle East wars do not end soon, the Fed will find it difficult to ignore the inflation rise driven by the supply shock three months ago."

US April PCE data shows inflationary pressures are widening, with core PCE hitting a two-and-a-half-year high.

Federal Reserve officials generally acknowledged that inflation was heading in the wrong direction, but most remained committed to maintaining interest rates as a benchmark, while hawkish voices grew significantly – Cook stated that they were “prepared to raise rates,” and Waller, previously the most dovish, has shifted his stance and supports revising policy wording. The consumer savings rate falling to 2.6% indicates that high prices are eroding purchasing power, while the 2-year Treasury yield remaining at 4% reflects the market's pricing in a rate hike this year.

According to CME's "FedWatch": The probability of the Federal Reserve keeping interest rates unchanged by June is 99.4%, with a 0.6% probability of a cumulative 25 basis point rate hike. The probability of the Federal Reserve keeping interest rates unchanged by July is 93%, with a 6.9% probability of a cumulative 25 basis point rate hike. The probability of the Federal Reserve keeping interest rates unchanged by December is 52.3%, with a 52.3% probability of at least a 25 basis point rate hike.