New readings from the Federal Reserve’s preferred inflation gauge could leave open the possibility that the central bank will signal a rate cut in September when it meets next week.
“This confirms that there will be no cut in July and that the Fed will be preparing for the first rate cut at the September meeting,” said Wilmer Stith, fixed-income portfolio manager at Wilmington Trust.
Gregory Daco, chief economist at EY, added that when Fed officials meet in Washington, D.C., on Tuesday and Wednesday, “we expect policymakers to have a lengthy and lively debate about whether and how they will signal a rate cut in September.”
The so-called core personal consumption expenditures (PCE) index, which excludes volatile food and energy prices, released on Friday showed inflation rose 2.6% in June from a year earlier.
That was more than economists had expected but unchanged from the previous month, marking the slowest annual increase in core PCE in more than three years.
The three-month annualized rate fell to 2.3% from 2.9%, marking further progress after better-than-expected figures in the first quarter.
The fact that the Fed’s preferred inflation gauge held steady in June gives policymakers time to scrutinize data from July and August to ensure that inflation is back on track with their 2 percent target before cutting rates in September.
“This is a near perfect result,” said Scott Helfstein, head of investment strategy at Global X ETFs.
“Inflation came in slightly stronger than expected, but the Fed is getting closer to its goal without sacrificing growth.”
However, a September rate cut is still not certain, he added in the note.
“A moderate acceleration in inflation could call into question the September rate cut that is already priced in.”
Daco argued that the Fed has the conditions necessary to start cutting rates now, saying, “Some policymakers may argue, as we have argued, that a July rate cut would be optimal and desirable, given current and projected economic conditions.”
Luke Tilley, chief economist at Wilmington Trust, said the data supports a July rate cut but that the Fed does not want to “surprise the markets.”
Traders widely expect the central bank to keep rates on hold next week before cutting them in September.
“The market will be asking, ‘What does the Fed know that we don’t?'” Tilley said. “The answer is the Fed has slightly more information than we do. I expect the communication to hint at a September rate cut.”
Federal Reserve Chairman Jerome Powell. (Reuters/Evelyn Hochstein/File Photo) (Reuters/Reuters)
Comerica chief economist Bill Adams added that the June PCE report “is consistent with our expectation that the Fed will keep rates on hold at its decision next week, followed by its first rate cut at its September meeting.”
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Fed officials are currently in an information blackout ahead of their policy meeting next week, so it is not yet clear how they will interpret today’s numbers.
But Fed Chairman Jay Powell said last Monday that second-quarter readings so far “provide some increased confidence” that inflation is on track toward the Fed’s 2 percent target.
The Fed chief told U.S. lawmakers earlier this month that inflation was “showing some further progress” and that “as we get better data, our confidence will increase that inflation is on a sustained path to 2 percent.”
Other Fed officials have reinforced this view in recent weeks.
Federal Reserve Governor Chris Waller said there was growing evidence that disappointing inflation data in the first three months of the year may have been an “anomaly.”
He doesn’t think the Fed is ready to cut rates yet, but said, “We are approaching a point where a cut in the policy rate would be justified.”
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