Inflation continued to show signs of easing in the Federal Reserve’s preferred pricing index, setting the central bank up to cut interest rates for the first time in more than four years next month. The personal consumption expenditures, or PCE, index for July came in at 2.5% over the same point last year, according to a report released by the Bureau of Economic Analysis on Friday. Core PCE, which factors out food and energy, was up 2.6% year over year. Prices rose 0.2% from June in both indexes. Both the headline and core figures mirrored June’s readings of 2.5% and 2.6%, respectively.
Federal Reserve Chair Jerome Powell has stated that the downward trajectory of inflation has bolstered his confidence that inflation is on a “sustainable path” to the Fed’s 2% target. Powell’s speech in Jackson Hole, Wyoming highlighted that the inflation picture has improved to the point where the Fed could begin easing monetary policy in the near future.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Market participants have been anticipating a rate cut of at least a quarter percentage point since the Fed’s last FOMC meeting in July. Two-thirds of the contracts priced in a 25-basis-point cut while the rest expected a half-percentage-point drop. The favorable PCE inflation reading was broadly expected, with other key indexes from July showing positive trends in inflation as well.
The focus now turns toward the labor market with two key reports due out next week. The Job Openings and Labor Turnover Survey, or JOLTS, report from July, is set for release on Wednesday, followed by the Employment Situation report for August scheduled for release on Friday. Powell emphasized in his Jackson Hole speech that the full employment side of the Fed’s dual mandate is currently a more pressing concern than price stability.
“The upside risks to inflation have diminished and the downside risks to employment have increased,” Powell stated. “As we highlighted in our last FOMC statement, we are attentive to the risks to both sides of our dual mandate.”
Looking ahead, there will be another Consumer Price Index (CPI) release on Sept. 11, one week before the next rate-setting meeting. While core PCE is the Fed’s preferred measure, the FOMC considers a wide range of readings when making decisions about monetary policy adjustments.
Overall, the data suggests that the Federal Reserve may be on track to cut interest rates for the first time in several years. With inflation showing signs of easing and market expectations leaning towards a rate cut, the upcoming labor market reports will likely play a crucial role in shaping the Fed’s decision-making process. Powell’s focus on maintaining a balance between price stability and full employment highlights the challenges faced by the central bank in navigating economic uncertainties.