Fed Signals Potential September Rate Cut as Inflation Steadies

Key Points:
– Core PCE Index rose 2.6% year-over-year in June, unchanged from May.
– Three-month annualized inflation rate fell to 2.3% from 2.9%.
– Economists anticipate the Fed may signal a September rate cut at next week’s meeting.

The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, showed signs of stabilization in June, potentially paving the way for a rate cut in September. This development has caught the attention of economists and market watchers alike, as it could mark a significant shift in the Fed’s monetary policy.

According to the latest data, the core PCE Index, which excludes volatile food and energy prices, rose 2.6% year-over-year in June. While this figure slightly exceeded economists’ expectations, it remained unchanged from the previous month and represented the slowest annual increase in over three years. More importantly, the three-month annualized rate declined to 2.3% from 2.9%, indicating progress towards the Fed’s 2% inflation target.

Economists are divided on the implications of this data. Wilmer Stith, a bond portfolio manager at Wilmington Trust, believes that this reinforces the likelihood of no rate movement in July and sets the stage for a potential rate cut in September. Gregory Daco, chief economist at EY, anticipates a lively debate among policymakers about signaling a September rate cut.

However, the path forward is not without challenges. Scott Helfstein, head of investment strategy at Global X ETFs, cautioned that while the current outcome is nearly ideal, modestly accelerating inflation could still put the anticipated September rate cut in question.

The Fed’s upcoming policy meeting on July 30-31 is expected to be a crucial event. While traders widely anticipate the central bank to hold steady next week, there’s growing speculation about a potential rate cut in September. Luke Tilley, chief economist at Wilmington Trust, suggests that while the data supports a July cut, the Fed may prefer to avoid surprising the markets.

Fed Chair Jerome Powell’s recent comments have added weight to the possibility of a rate cut. In a testimony to US lawmakers, Powell noted that recent inflation numbers have shown “modest further progress” and that additional positive data would strengthen confidence in inflation moving sustainably toward the 2% target.

Other Fed officials have echoed this sentiment. Fed Governor Chris Waller suggested that disappointing inflation data from the first quarter may have been an “aberration,” and the Fed is getting closer to a point where a policy rate cut could be warranted.

As the Fed enters its blackout period ahead of the policy meeting, market participants are left to speculate on how officials might interpret the latest PCE data. The steady inflation reading provides the Fed with more time to examine July and August data before making a decision on a September rate cut.

The upcoming Fed meeting will be closely watched for any signals about future rate movements. While a July rate cut seems unlikely, the focus will be on any language that might hint at a September adjustment. As Bill Adams, chief economist for Comerica, noted, the June PCE report is consistent with the Fed holding rates steady next week but potentially making a first rate cut in September.

As the economic landscape continues to evolve, the Fed’s decision-making process remains under intense scrutiny. The balance between controlling inflation and supporting economic growth will undoubtedly be at the forefront of discussions as policymakers navigate these uncertain waters. The coming months will be crucial in determining whether the Fed’s cautious approach to rate cuts will be validated by continued progress in taming inflation.

Fed’s Cautious Approach: Two Rate Cuts Expected in 2024 Despite Market Optimism

Key Points:
– Economists predict two Fed rate cuts in 2024, less than market expectations
– Resilient consumer demand and strong labor market support a cautious approach
– Inflation easing but not expected to reach 2% target until at least 2026

In a recent Reuters poll, economists have outlined a more conservative outlook for Federal Reserve interest rate cuts compared to current market expectations. While financial markets are pricing in two to three rate reductions this year, a growing majority of economists anticipate only two cuts, scheduled for September and December 2024. This cautious stance reflects the complex interplay between easing inflation, robust consumer spending, and a resilient labor market.

The survey, conducted from July 17-23, revealed that over 80% of the 100 economists polled expect the first 25-basis-point cut to occur in September. This would bring the federal funds rate to the 5.00%-5.25% range. Nearly three-quarters of respondents predicted a second cut in December, maintaining this view for the past four months despite shifting market sentiments.

The rationale behind this conservative approach lies in the unexpected strength of the U.S. economy. June’s retail sales data surpassed expectations, indicating that consumer spending remains a powerful economic driver. Additionally, the unemployment rate, currently at 4.1%, is not projected to rise significantly. These factors suggest that the economy may not require as much monetary policy support as previously thought.

Inflation, while decelerating, continues to be a concern for policymakers. The personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, is expected to show only a slight decline to 2.5% in June from 2.6% in May. More importantly, economists don’t foresee inflation reaching the Fed’s 2% target until at least 2026, underscoring the persistent nature of price pressures.

The divergence between economist predictions and market expectations has notable implications. Recent market movements have seen stocks rise by around 2% and yields on 10-year Treasury notes fall by more than 25 basis points this month, reflecting optimism about potential rate cuts. However, the more measured outlook from economists suggests that market participants may need to temper their expectations.

Looking ahead, the Fed’s decision-making process will be heavily influenced by upcoming economic data. This week’s releases, including the second-quarter GDP growth rate and June’s PCE price index, will be crucial in shaping the economic landscape. Economists project Q2 GDP growth at an annualized rate of 2.0%, up from 1.4% in Q1, indicating continued economic expansion.

The long-term outlook suggests a gradual easing of monetary policy. Economists anticipate one rate cut per quarter through 2025, potentially bringing the federal funds rate to the 3.75%-4.00% range by the end of that year. This measured approach aligns with the Fed’s dual mandate of maintaining price stability and maximum employment.

It’s worth noting that the U.S. economy is expected to grow by 2.3% in 2024, surpassing the Fed’s estimated non-inflationary growth rate of 1.8%. This robust growth projection further supports the case for a cautious approach to rate cuts.

In conclusion, while the Federal Reserve has made progress in its fight against inflation, the path forward remains complex. The resilience of the U.S. consumer and labor market, coupled with stubborn inflationary pressures, necessitates a balanced approach to monetary policy. As we move through 2024, market participants and policymakers alike will need to closely monitor economic indicators to gauge the appropriate pace of monetary easing.