Latest inflation data was ‘best possible’ outcome for the Fed, economist says

The Fed’s preferred measure of inflation continues to moderate, pointing to an imminent rate cut in September
By Sam Bourgi
•
04 September 2024
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Consumer prices edged higher in July, but not by enough to raise concern ahead of the Federal Reserve’s first interest rate cut in more than four years.

According to the Department of Commerce, the Core Personal Consumption Expenditures (PCE) index rose 0.2% in July and was up 2.5% annually, in line with the consensus forecast.

The Fed’s trusted core PCE index, which strips away volatile food and energy prices, rose 0.2% from June and 2.6% annually. The annual increase was slightly below economists’ forecasts.

“In some ways, it was the best possible increase to the PCE,” Tani Fukui, an economist at MetLife Investment Management, told The Wall Street Journal.

In Fukui’s view, the biggest takeaway from the report was that service inflation continued to be a non-issue after policymakers flagged this category as a top concern in previous months.

“That was more the Fed’s concern, and that did not produce a concern,” she said.

After the inflation data was released, LPL Financial chief economist Jeffrey Roach said, “I think investors are right to expect the Fed to not only just cut in September, but continue the cutting process the rest of the year.”

Roach’s comments align with Fed Fund futures prices, which imply a 100% likelihood of rate cuts in September, November, and December.

Rate cuts to be slow and steady at first

Although policymakers have made it abundantly clear that rate cuts are coming, they’ve resisted the idea of jumbo-sized reductions to the federal funds rate.

Fed governors Raphael Bostic, Austan Goolsbee, and Neel Kashkari have said publicly that standard reductions of 0.25% are the most appropriate at this stage.

In Kashkari’s view, there’s no need to cut rates in larger increments until the central bank sees “some quicker deterioration in the labor market.”

The latest consumer spending data seems to have reinforced the Fed’s slow and steady approach. According to the Department of Commerce, consumer spending increased at a solid 0.5% pace in July.

“This is not the kind of spending growth associated with recession,” said Conrad DeQuadros, a senior economic adviser with Brean Capital.

Although the economy seems to have staved off recession risks for now, economists say the forthcoming nonfarm payrolls report could set the tone for the Fed’s September policy meeting. The Bureau of Labor Statistics (BLS) will release the August jobs report on Sept. 6.

In a speech at the Jackson Hole Symposium, Fed Chair Jerome Powell said the central bank will act decisively to prevent “further cooling” in labor market conditions.

His comments came on the heels of a massive revision to job growth figures between March 2023 and March 2024. According to BLS, the economy added 818,000 fewer jobs than initially reported over that 12-month period.

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