Fed’s Inflation Gauge Aligns with Expectations
The latest reading of the Fed’s preferred inflation gauge showed price increases in July that aligned with Wall Street’s expectations. The core Personal Consumption Expenditures (PCE) index, which excludes food and energy prices, rose 0.2% from the prior month. This increase matched both the expectations of analysts and the 0.2% rise seen in June.
Over the past year, prices increased by 2.6% in July. This annual rate also matched June’s level and was slightly below the forecast of 2.7%. The data suggests inflation pressures are stabilizing, aligning with the Federal Reserve’s 2% target.
Fed Signals Rate Cut & Inflation Gauge
The report comes after Fed Chair Jerome Powell’s speech in Jackson Hole, Wyoming, where he hinted strongly at a rate cut next month. Powell stated that the “time has come for policy to adjust,” and expressed growing confidence that inflation is moving back towards the Fed’s 2% goal.
Friday’s inflation report is unlikely to alter Powell’s view. According to Nationwide’s senior economist Ben Ayers, a September rate cut is now almost certain. However, Ayers also noted that further easing in inflation could allow the Fed to be more aggressive in future rate cuts, especially if the labor market shows signs of significant weakness.
Labor Market Concerns
Economists have pointed out that while the decline in inflation is crucial for the Fed’s decision-making on rate cuts, labor market conditions are also a key concern. Ryan Sweet, chief US economist at Oxford Economics, said that the Fed now places less emphasis on monthly inflation data and more on broader economic trends.
“It’s not going to be a smooth, easy ride,” Sweet said, highlighting the potential for volatility in future inflation readings. Nevertheless, he noted that the Fed’s preferred inflation gauge remains “within spitting distance” of its target, suggesting that inflation is moving in the right direction.
Market Expectations for Rate Cuts
Investors are now anticipating a rate cut in September. However, the extent of the cut remains uncertain. As of Friday morning, market data from the CME FedWatch Tool indicated a roughly 33% chance that the Federal Reserve will lower interest rates by 50 basis points at its September meeting.
The expectation of rate cuts has been fueled by a combination of stabilizing inflation and concerns about the labor market. A more aggressive rate cut could be considered if inflation continues to cool and the labor market weakens further.
The latest Fed’s inflation gauge data supports the view that the Federal Reserve is on track to cut rates soon. With prices stabilizing and inflation near the Fed’s target, a rate cut in September appears likely. However, the size of the cut will depend on further economic data, particularly regarding the labor market. Investors will be closely watching for any signs of a more aggressive approach from the Fed in the coming months.
Source Yahoo Finance
