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A significant inflation indicator for the Federal Reserve showed a modest increase in June compared to the previous year, potentially setting the stage for an anticipated interest rate cut in September.
The personal consumption expenditures (PCE) price index, a key measure of inflation, rose by 0.1% in June and was up 2.5% year-over-year, aligning with Dow Jones estimates, the Commerce Department reported on Friday. This follows a 2.6% year-over-year increase in May, with the monthly measure remaining unchanged.
The Federal Reserve relies heavily on the PCE index to gauge inflation, which remains above the central bank’s long-term target of 2%.
Core inflation, which strips out food and energy prices, saw a 0.2% month-over-month increase and a 2.6% rise year-over-year, both meeting expectations. Policymakers focus on core inflation as it is considered a more reliable indicator of long-term trends due to the volatility of food and energy prices.
Following the report, stock market futures indicated a positive opening on Wall Street, while Treasury yields decreased. Futures markets are now betting on a more aggressive trajectory for the Fed’s interest rate cuts.
“The report can be summed up as ‘pretty good,’” said Robert Frick, corporate economist at Navy Federal Credit Union. “Spending is sufficient to sustain economic expansion, income levels support continued spending, and PCE inflation is conducive to the Fed cutting rates.”
In June, goods prices fell by 0.2%, while services prices increased by 0.2%. House prices rose by 0.3%, showing a slight deceleration from the 0.4% increases observed in the previous three months, marking the smallest monthly gain since at least January 2023.
Additionally, the report revealed that personal income increased by just 0.2%, falling short of the 0.4% estimate. However, spending rose by 0.3%, in line with forecasts.
With spending remaining stable, the savings rate dropped to 3.4%, its lowest level since November 2022.
This report comes at a critical time as markets closely monitor the Fed’s monetary policy direction.
There is minimal anticipation that the Federal Open Market Committee (FOMC) will make any changes at its upcoming policy meeting next Tuesday and Wednesday. However, market indicators strongly suggest a rate cut at the September meeting, which would be the first rate cut since the early stages of the Covid pandemic.
“Overall, it’s been a favorable week for the Fed. The economy seems solid, and PCE inflation remains relatively stable,” said Chris Larkin, managing director of trading and investing at E-Trade Morgan Stanley. “A rate cut next week is unlikely, but the economic data has been trending in a direction that supports a potential cut in September.”
After inflation peaked at its highest level in over 40 years in mid-2022, the Fed implemented a series of aggressive rate hikes, bringing its benchmark lending rate to its highest point in about 23 years. However, the Fed has paused these hikes over the past year to evaluate mixed economic data that initially indicated rising inflation but has recently shown signs of gradual cooling, prompting discussions among policymakers about the possibility of at least one rate cut this year.
According to CME Group’s FedWatch tool, futures markets have priced in approximately a 90% chance of a rate cut in September, with additional cuts expected at the November and December FOMC meetings.
Fed officials, however, have been cautious in their public statements, emphasizing that future policy decisions will be data-dependent.
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