The Federal Reserve’s favored inflation measure ticked up in July, aligning with Wall Street’s expectations and reinforcing the likelihood of a rate cut in September.
The core Personal Consumption Expenditures (PCE) index, a key metric that excludes volatile food and energy costs, climbed 0.2% for the month, matching both June’s increase and analysts’ forecasts.
On an annual basis, the index registered a 4.2% rise, holding steady from June and narrowly missing the anticipated 4.3% uptick.
This latest data arrives on the heels of Fed Chair Jerome Powell’s Jackson Hole remarks, where he hinted at a potential rate cut next month, signaling that the “time has come for policy to adjust.”
Powell’s growing confidence that inflation is inching back toward the Fed’s 2% target appears to be holding steady.
For market watchers, Friday’s report brings little surprise but much validation.
“A September rate cut is assured after Powell’s Jackson Hole comments,” noted Ben Ayers, senior economist at Nationwide, in a note to clients.
He added that the continued cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings, especially if the labor market shows a steep deterioration.
Indeed, economists are beginning to weigh the balance between inflation and labor market concerns.
“While inflation’s decline remains crucial, the Fed is also keeping an eye on potential cracks in the labor market,” said Ryan Sweet, chief U.S. economist at Oxford Economics, noting a shift in the Fed’s focus.
Yet, Sweet also cautioned against expecting a smooth trajectory. “It won’t be a smooth, easy ride,” he remarked on August 23.
“There are going to be bumps along the road with the inflation numbers.”
Despite the potential for volatility, he observed that the PCE index is still within “spitting distance” of the Fed’s target.
With investors widely anticipating a rate cut in September, the real debate now centers on the size of the reduction.
As of Friday morning, the CME FedWatch Tool reflected a roughly 33% probability of a 50-basis-point cut by the end of the Fed’s September meeting.
As the business community braces for the Fed’s next move, the central bank’s decision could set the tone for markets heading into the final stretch of the year.
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