Fed’s Preferred Inflation Tracker Cools: What It Means for September Rate Cuts

Last updated: July 1, 2024

federal-reserveThe Federal Reserve’s closely-watched inflation measure has cooled to its smallest annual rise in three years, hinting at a potential rate cut this September.

The personal consumption expenditures index (PCE) rose just 2.6% year-over-year in May, marking its lowest increase since March 2021, as reported by the U.S. Commerce Department.

EY senior economist Lydia Boussour noted the slowdown signals “cooler consumer spending momentum and easing inflation.” Wall Street business analysts are now more optimistic about a rate cut in September.

Earlier this month, the Fed adjusted its forecast, scaling back expectations to a single rate cut in 2024 from three, due to persistent inflation still above the 2% target. Friday’s PCE data, however, might be shifting the odds.

John Kerschner, head of U.S. securitized products at Janus Henderson Investors, remarked that the market now sees a 75% chance of a rate cut at the Fed’s September 18th meeting.

Excluding the volatile food and energy sectors, core inflation saw a mere 0.1% rise from April to May, the smallest increase since the early days of the pandemic in 2020.

Prices for physical goods dropped 0.4%, with notable decreases in gasoline (-3.4%), furniture (-1%), and recreational goods and vehicles (-1.6%). Conversely, service prices, including restaurant meals and airline fares, inched up by 0.2%.

The Fed has raised its benchmark rate 11 times since 2022 to combat the highest inflation in four decades.

While inflation has significantly cooled from its 2022 peak, prices remain higher than pre-pandemic levels, causing frustration among Americans and posing a potential challenge for President Joe Biden’s re-election campaign.

In essence, the latest data could be the wind beneath the Fed’s wings for a rate cut this fall, as the battle against inflation shows signs of easing.

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