2024-07-26 21:46:24
A key Federal Reserve indicator showed inflation fell slightly in June from a year earlier, paving the way for a widely expected interest rate cut in September.
The US Commerce Department reported on Friday that the personal consumption expenditures price index rose 0.1% in May from the previous month and 2.5% from a year earlier, in line with Dow Jones’ forecast. The monthly index was flat, with a 2.6% year-on-year increase in May.
Fed officials use a measure of personal consumption expenditures as their main benchmark for measuring inflation, which remains above the central bank’s long-term 2% target.
Core inflation, which excludes food and energy, rose 0.2% month-over-month and 2.6% year-over-year, both in line with expectations. Because gasoline and grocery costs tend to be more volatile than other goods, policymakers pay more attention to core inflation as a better indicator of long-term trends.
Wall Street stock futures opened higher after the announcement, while U.S. Treasury yields fell. Futures markets expect the Federal Reserve to take a more aggressive path of rate cuts.
“This report can be summed up in two words: ‘good enough,’ ” said Robert Frick, corporate economist at Navy Federal Credit Union. “Spending was good enough to sustain the expansion, revenues were good enough to sustain spending, and PCE inflation was good enough for the Fed to make an easy decision to cut rates.”
Goods prices fell 0.2% for the month, while service prices rose 0.2%. Housing-related prices rose 0.3% in June, a slight slowdown from the 0.4% increase in each of the past three months and the smallest monthly increase since at least January 2023.
The report also showed personal income rose just 0.2%, below expectations for a 0.4% gain. Spending rose 0.3%, in line with expectations.
As spending remained relatively strong, the savings rate fell to 3.4%, the lowest level since November 2022.
The report comes as markets closely watch the direction of the Federal Reserve’s monetary policy.
Few expect the Federal Reserve’s Open Market Committee to take any action when it meets next Tuesday and Wednesday. Still, market pricing strongly suggests the Fed will cut interest rates at its September meeting, which would be the first rate cut since the early days of the coronavirus pandemic.
“Overall, it was a good week for the Fed. The economy appears to be on solid footing, with PCE inflation remaining broadly stable,” said Chris Larkin, managing director of trading and investing at E-Trade Morgan Stanley. “But the odds of a rate cut next week remain slim. While there is still plenty of time for economic conditions to change before the September FOMC meeting, the data has been moving in the Fed’s favor.”
With inflation set to rise to its highest level in more than 40 years by mid-2022, the Fed embarked on an aggressive series of rate hikes that lifted its benchmark lending rate to its highest level in about 23 years. However, the Fed has been on pause over the past year as it assesses volatile data that showed a resurgence in inflation earlier this year but more recently showed a gradual cooling, and many policymakers are discussing the possibility of at least one rate cut this year.
Futures markets are pricing in about a 90% chance of a rate cut by the Federal Open Market Committee in September, followed by further cuts at its November and December meetings, according to CME Group’s FedWatch indicator.
However, Fed officials have been cautious in their speeches, emphasizing that there is no set policy path and that data can provide guidance.
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