Fed's Favorite Inflation Gauge Keeps Falling But Fed Wants 'Durable Downward Trend,' Economist Says
The Personal Consumption Expenditure (PCE) price index keeps falling. This reaffirms the possibility that the Federal Reserve will cut the key interest rate by September.
The PCE, the Fed’s favored inflation indicator which tracks U.S. consumer spending, rose 2.5% on an annual basis in June, down from a 2.6% jump in May.
Excluding food and energy, the core PCE index remained at 2.6% last month and from a year ago, missing an expected decline to 2.5%.
The index rose by 0.2% on a monthly basis, up from a 0.1% increase in May, beating forecasts.
Personal income rose 0.2% from May but fell shy of the prior 0.4% month-over-month increase and the estimated 0.4%.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the Fed should be able to stick to its plan to cut rates in September and December as long as inflation data keeps coming in like it has — “not too hot and not too cold.”
“The Fed has indicated that they've wanted to cut rates all year long and the inflation data in Q1 prevented them from lowering rates sooner, but for the past few months the inflation data have been cooperating and this morning's results won't leave anyone alarmed at a resurgence in inflation,” he said.
The market has recently become more fearful of slowing economic growth rather than sticky inflation, but the economy should be able to expand and the inflation rate should very slowly head lower to the Fed’s target of 2%.
“This backdrop is a good one for both equity and fixed-income investors and volatility will be an opportunity to accumulate good quality assets at prices off their peak levels,” he said.
Quincy Krosby, chief global strategist for LPL Financial, said the lower two-year and 10-year Treasury yields ensure that Friday’s PCE report will confirm for the Fed’s Federal Open Market Committee that inflation will maintain a downward trend.
“Similarly, equity futures remain in the green suggesting that the market — decidedly oversold on a short-term basis — could edge higher into the close,” she said.
“Still, next week's earnings reports from a heavy package of mega-cap tech names, will be a crucial test for a market that is trying to find direction amid mixed economic data and underpinned by a historically negative seasonal pattern.”
Jeffrey Roach, chief economist for LPL Financial, noted that inflation continues to slowly approach the Fed’s target rate. The Fed should point to the slowdown in hiring as a reason to cut rates at the September meeting.
“As it relates to business activity, real disposable income per capita continues to rise, giving consumers the ability to keep spending despite high price levels. So, we are paying more but we are getting paid more,” he said.
Bill Adams, chief economist for Comerica Bank, said the June PCE report met the Fed’s expectations on inflation’s downward trend. Still, the Fed has repeatedly said that it is looking for inflation to fall more into a “durable downward trend” before it decides to lower rates.
“This report looks pretty similar to the last few, and so the Fed will see it as adding to the evidence that inflation is slowing,” he said.
“The Fed won't see a glaring reason to immediately cut interest rates in this report. But at their meeting next week, they will likely signal a quarter-percentage-point rate cut at the following decision in September. Another quarter percentage point cut is likely in December.”
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Posted-In: Bill Adams Chris Zaccarelli Comerica Bank Federal ReserveTop Stories Economics Federal Reserve Markets
