The latest US inflation data, released on August 30, 2024, has reinforced expectations of imminent interest rate cuts by the Federal Reserve. The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation measure, held steady at 2.5% year-over-year in July, marking its second consecutive month at this level and edging closer to the central bank’s 2% target.This stability in inflation, combined with robust consumer spending and continued economic growth, has significantly increased market confidence in the Fed’s ability to achieve a ‘soft landing’ for the economy. The core PCE, which excludes volatile food and energy prices, rose by 2.6% annually, slightly below the 2.7% forecast.The data has fueled expectations of interest rate cuts, with many analysts now predicting the first cut as early as September. According to the CME Group’s FedWatch tool, there’s a 67.5% probability of a 25 basis point cut at the September 18 meeting, with a 32.5% chance of a more aggressive 50 basis point reduction. Some economists, like those at ING Bank, believe the Fed has essentially ‘given the green light for a rate cut in September’.However, the upcoming jobs report, due next Friday, is seen as crucial in determining the exact timing and size of potential rate cuts. Fed Chair Jerome Powell has indicated that the labor market has become a primary focus as the central bank balances its dual mandate of price stability and full employment.Market reactions to the inflation data were mixed. While some indices like the Nasdaq showed gains, others like the Dow Jones experienced slight declines. The prospect of rate cuts has particularly boosted expectations for growth in technology and large-cap stocks.Despite the positive outlook, some experts urge caution. Nigel Green, CEO of deVere Group, suggests that while a rate cut could drive major indices to new highs, investors should remain selective, focusing on companies with solid balance sheets and sustainable business models.As the Federal Reserve’s September 17-18 meeting approaches, all eyes will be on the upcoming jobs report, which could significantly influence the decision on rate cuts. The market is pricing in a total of 100 basis points in cuts by the end of the year, reflecting growing confidence in the Fed’s ability to navigate the economy towards a soft landing.
Key points
- US PCE inflation index remained steady at 2.
- Markets are pricing in a high probability of a rate cut in September, with some considering a 50 basis point cut.
- The upcoming jobs report is seen as crucial for determining the timing and size of potential rate cuts.
5% in July, approaching the Fed’s 2% target.
Contradictions👾While most sources indicate a likely 25 basis point cut in September, some analysts suggest the possibility of a more aggressive 50 basis point cut, showing some disagreement on the exact size of the potential rate cut.
