U.S. PPI records the smallest month-on-month increase since July. Is the "Fed's put option" getting closer to being exercised?

According to data released by the U.S. Bureau of Labor Statistics on Thursday, the Producer Price Index (PPI) in the U.S. remained unchanged month-on-month in February, following an upward revision of January's PPI increase from 0.4% to 0.6%. The so-called "core PPI," which excludes food and energy, saw its first month-on-month decline below the baseline since July of last year. However, the PPI data report indicated an unexpected significant increase in U.S. commodity prices, and the relevant sub-item data concerning core Personal Consumption Expenditures (PCE) suggests that the core PCE, to be released at the end of the month, may not be as optimistic as the market expects.

The U.S. PPI for February was 0%, the smallest increase since July of last year; the expected value was 0.3%, and the previous value was 0.6%. However, despite the overall PPI remaining flat and the core PPI showing a month-on-month decline, the inflation measure favored by Federal Reserve officials—the "core Personal Consumption Expenditures Price Index" (core PCE)—related sub-item data appears less optimistic, with February's core PCE likely still far above the 2% target. This includes an unexpected 1% increase in hospital inpatient care costs and a 0.5% increase in portfolio management costs that exceeded expectations. This also means that the "Federal Reserve put option" anticipated by the market still needs to focus on the cooling trend of core PCE.

The CPI report released by the U.S. Bureau of Labor Statistics on Wednesday showed that although last month's consumer prices (overall CPI) only rose 0.2% month-on-month, marking the smallest increase since October of last year, some details of the CPI also indicate that the core PCE price index may be higher than last month's statistics when the core PCE figures are released later this month.

In terms of core PPI data, the U.S. core PPI increased by 3.4% year-on-year in February, below the general expectation of economists at 3.5%, and significantly cooled compared to the previous value of 3.6%; the core PPI decreased by 0.1% month-on-month, far below the general expectation of economists for a month-on-month increase of 0.3%, and a significant cooling compared to the previous month-on-month increase of 0.5%. However, service prices, excluding trade, transportation, and warehousing, unexpectedly rose by 0.2% month-on-month.

Additionally, U.S. President Donald Trump recently announced comprehensive tariff measures against the U.S.'s largest trading partner, which is expected to lead to an increase in import prices in the coming months.

Overall, the details of the PPI data released on Thursday evening Beijing time showed that food prices rose by 1.7% month-on-month, marking the largest increase in three months; energy prices decreased by 1.2%; the prices of goods excluding food and energy rose by 0.4% month-on-month, unexpectedly marking the largest increase since the beginning of 2023; service prices decreased by 0.2% month-on-month, reflecting a contraction in the profit margins of wholesalers and retailers Despite the overall Producer Price Index remaining flat, the details of various data show a mixed performance. This may indicate that the upcoming Personal Consumption Expenditures (PCE) price index could be stronger than expected and the previous month's statistics, increasing the uncertainty of the Federal Reserve's monetary policy decisions.

Additionally, U.S. President Trump recently announced broad tariff measures against major trading partners, which could further raise the prices of imported goods in the U.S. in the coming months, creating additional inflationary pressure.

The "Fed put" that the market anticipates is still far from the strike price

Although the flat PPI in February indicates a temporary easing of inflationary pressure, rising service costs and potential inflationary pressures from trade policies may make the Federal Reserve more cautious in adjusting monetary policy. Therefore, the market should not overly rely on the expectation of the "Fed put" and should closely monitor the upcoming PCE price index and other economic indicators to assess the Fed's next actions.

After the latest PPI data was released, there was little change in the market's bets on a rate cut by the Federal Reserve. The CME "FedWatch Tool" shows that interest rate futures traders still bet that the Fed will cut rates three times this year, each by 25 basis points, with the first cut expected in June, followed by possible cuts in September and December.

Recently, Goldman Sachs, once seen as an "optimist," joined the ranks of those downgrading U.S. economic growth expectations, lowering its 2025 U.S. GDP growth forecast from 2.4% to 1.7%, marking the first time in over two years that the bank has lowered its GDP forecast below the general expectation level.

At the same time, Goldman Sachs raised its inflation expectations for the U.S., predicting that by the end of this year, the Fed's preferred inflation measure—the core PCE price index—will reach 3%, higher than the previously forecasted mid-term level of 2%.

Some market views suggest that Goldman Sachs' shift in core PCE expectations marks an accelerating concern in the market about the risk of the U.S. economy falling into "stagflation," with the so-called "Fed put" strike price seemingly bottomless.

The so-called "Fed put," also known as the "Powell put" or "Greenspan put," is not a real financial derivative but rather a market metaphor. This concept refers to the idea that when U.S. financial markets (especially the stock market) decline significantly and the economic outlook worsens, the Federal Reserve typically intervenes, such as by lowering interest rates, releasing liquidity, or providing other easing policies to support the market and prevent further declines in the stock market. Thus, this implicit supportive behavior is likened to a "put option," with investors believing that the Fed will intervene when the market deteriorates to a certain extent, providing a degree of protection.

However, in the context of rising expectations of "stagflation" in the U.S. economy, the path from economic slowdown to rate cuts is not a straight line; if inflation remains moderate, especially if the core PCE does not significantly cool down, investors and Fed officials will have to continue monitoring whether the downside risks to economic growth will materialize. Despite several confidence indices showing signs of a U.S. economic downturn, high inflation in goods and services and potential inflationary pressures from Trump's tariff policies may limit the Fed's policy space The interaction between the Federal Reserve and the Trump administration increasingly resembles a "repeated game." From a game-theoretic perspective, credibility is paramount. If there are clear signs of an economic recession, the Federal Reserve will certainly cut interest rates quickly. However, a more challenging situation arises when U.S. economic growth slows to below trend levels (but still positive) while inflation remains above the Federal Reserve's anchored target of 2%. In this case, lowering interest rates could convey the message that the Federal Reserve does not prioritize its inflation target