Cooling inflation puts Fed on track for September rate cut

Federal Reserve policymakers received further confirmation on Friday that inflation continues to moderate, opening the door
the door to a first interest rate cut next month, while focusing on avoiding a further cooling of the labor market.

According to the Commerce Department, the personal consumption expenditures (PCE) price index rose 2.5% in July from a year earlier, matching June’s gain. Over the past three months, the annualized reading of the Fed’s preferred inflation gauge has been well below its 2% target.

The latest inflation reading was slightly better than widely expected when Fed Chairman Jerome Powell said last week that “the time has come” to cut rates, following a tough battle against high inflation.

“Recent price action confirms that the end of the Fed’s fight against inflation is in sight,” which ensures a rate cut at the policy meeting on September 17-18, wrote Ben Ayers, an economist at Nationwide.

“The further cooling of inflation could give the Fed room to be more aggressive with rate cuts at upcoming meetings, especially if the labor market shows a sharp deterioration,” he added.

Following the release of the report, which also showed a solid rise in consumer spending, traders slightly increased bets that the Fed will lean toward a quarter-percentage point cut at first, but will implement a larger half-percentage point cut at a later meeting. They also continue to bet on a full percentage point cut by the end of the year.

Investors’ and the Fed’s attention now turns to a series of key data to be released next week, including the US government’s August employment report, due on Friday.

Other data will include the publication of anecdotes from surveys and interviews conducted across the country in what is known as the Fed’s “Beige Book,” which central bank officials say provides a more up-to-date view of the economy’s performance.

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