Fed’s Preferred Inflation Measure Moderates, Fueling September Rate Cut Expectations

The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose moderately in June, increasing by 0.1% month-over-month and 2.5% year-over-year, down from 2.6% in May. The core PCE, which excludes volatile food and energy prices, increased by 0.2% monthly and 2.6% annually, slightly above the forecasted 2.5%.This data has kept alive the possibility of a Federal Reserve interest rate cut in September, with markets pricing in a high probability of such a move. According to futures market pricing, there’s around a 90% chance of a rate cut in September, followed by additional cuts in November and December. Greg Wilensky, head of US fixed income at Janus Henderson Investors, commented that the inflation data provides what the Fed and the market need to keep the Fed on a path to a first cut to their policy rate in September.The inflation figures, combined with steady consumer spending, suggest the Fed’s monetary policy is effectively managing inflation without significantly harming the economy. Consumer spending adjusted for inflation rose 0.2% in June, with May’s increase revised upward. This positive economic momentum is reflected in the estimated 2.8% GDP growth for the second quarter.In response to this news, U.S. stock markets rallied, with the Dow Jones Industrial Average rising 1.5%, the S&P 500 gaining 0.9%, and the Nasdaq Composite up 0.75%. Meanwhile, Treasury yields declined, with the 10-year note yield falling 6 basis points to 4.196%, and the dollar weakened against a basket of currencies.Looking ahead, some economists are projecting even more aggressive rate cuts. Joseph Brusuelas, chief economist at RSM, noted that if the market data holds, the federal funds rate could be reduced by 100 basis points over the next 180 days. However, the key question remains whether the positive economic momentum will be sustained heading into the September Fed meeting.

Key points

• The PCE price index rose 0.

1% month-over-month and 2.

5% year-over-year in June, indicating moderate inflation.

• Markets are pricing in a high probability of a Federal Reserve rate cut in September, with additional cuts expected before year-end.
• U.

S.

stock markets rallied and Treasury yields declined in response to the inflation data.

• Consumer spending remains steady, suggesting the Fed’s policy is managing inflation without significantly harming the economy.

Contradictions👾While most sources indicate a high likelihood of a September rate cut, some analysts suggest the Fed might hold off until later in the year.