A key indicator for the Federal Reserve in June showed that inflation had declined slightly from a year earlier, paving the way for a widely expected interest rate cut in September.
The personal consumption expenditures price index rose 0.1 percent month-on-month, 2.5 percent above the year-on-year reading, in line with Dow Jones estimates, the Commerce Department reported Friday. The year-on-year increase was 2.6 percent in May, while the monthly reading was unchanged.
Fed officials use the PCE reading as their primary gauge of inflation, which remains above the central bank's long-term target of 2%.
Core inflation, which excludes food and energy, rose 0.2% and 2.6% month-on-month, respectively, also in line with expectations. Policymakers are focusing even more on core inflation as a better indicator of long-term trends, as the cost of gasoline and food tends to fluctuate more than other items.
Stock market futures pointed to a positive opening on Wall Street after the release, while US Treasury yields declined. Futures markets are factoring in a more aggressive rate-cutting stance from the Fed.
“A two-word summary of the report is 'good enough,'” said Robert Frick, corporate economist at Navy Federal Credit Union. “Spending is good enough to sustain growth, and revenue is good enough to sustain spending, and the level of PCE inflation is good enough to make the Fed's decision to cut rates easy.”
Goods prices fell 0.2% month-on-month, while services rose 0.2%. Housing-related prices rose 0.3% in June, a slight slowdown from the 0.4% increase in each of the previous three months and the smallest monthly increase since at least January 2023.
The report also said personal income rose just 0.2%, below the 0.4% estimate, while spending rose 0.3%, in line with the forecast.
As spending remained relatively strong, the savings rate fell to 3.4%, its lowest level since November 2022.
The report comes at a time when markets are closely monitoring the direction of the Fed's monetary policy.
There is little expectation that the Federal Reserve's rate-setting Open Market Committee will take any action at its meeting next Tuesday and Wednesday. However, market prices strongly suggest a rate cut at the September meeting, which would be the first cut since the early days of the Covid pandemic.
“Overall, it was a good week for the Fed. The economy appears to be on solid ground and PCE inflation remained essentially stable,” said Chris Larkin, managing director of trading and investments at E-Trade Morgan Stanley. “But a rate cut next week remains unlikely. And while there is still plenty of time for the economic picture to change before the September FOMC meeting, the numbers are trending in the Fed's direction.”
As inflation rose to its highest level in more than 40 years in mid-2022, the Fed initiated a series of aggressive rate hikes that took its benchmark interest rate to its highest level in about 23 years. However, the Fed has paused over the past year as it evaluates fluctuating data that showed inflation rebounding earlier this year but has recently shown a gradual cooling that has led many policymakers to debate the likelihood of at least one cut this year.
According to CME Group's FedWatch indicator, futures markets have priced in a roughly 90 percent probability of a rate cut in September, followed by cuts at the FOMC meetings in November and December.
However, Fed officials were cautious, stressing that there was no set policy course and that the data would provide direction.
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