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The
personal consumption expenditures (PCE) price index rose 2.5% in
July from a year earlier, the Commerce Department reported,
matching the gain in June. Over the most recent three months,
the annualized reading on the Fed's preferred gauge of inflation
is well below its 2% goal.
Fed Chair Jerome Powell said last week that "the time has come"
to cut rates, after a battle with decades-high inflation that
saw the U.S. central bank raising rates aggressively in 2022 and
2023. It has kept its policy rate in the 5.25%-5.50% range since
last July.
"The recent price trends confirm that the end of the Fed's
inflation fight is coming into view," assuring a rate cut at the
Sept. 17-18 policy meeting, Ben Ayers, senior economist at
Nationwide, wrote. "The further cooling of inflation could give
the Fed leeway to be more aggressive with rate declines at
coming meetings, especially if the labor market shows a steep
deterioration."
After the release of the report, which also showed consumer
spending rising solidly, traders kept bets that the Fed will
stick to a quarter-percentage-point reduction at first, but
deliver a bigger half-percentage-point cut at a later meeting.
Financial markets continue to price in the Fed cutting rates by
a full percentage point by the end of this year. Most analysts
are predicting a bit less, given how strong the economy has
been, but say that labor market readings will drive how
aggressive the Fed ultimately is.
The U.S. central bank has gone "from being an inflation-first
Fed to a labor-first Fed," is how economists at Evercore ISI
summed up the situation on Friday.
The unemployment rate has risen nearly a full percentage point,
to 4.3%, since the Fed stopped raising rates a little more than
a year ago. That is still low by historical standards but enough
for Powell to declare that the Fed would not welcome any further
weakening.
The focus of investors as well as the Fed now turns to a run of
key data before the September meeting, including the release of
the U.S. government's employment report for August on Friday and
the consumer price index report for August in the following
week.
(Reporting by Ann SaphirEditing by Ros Russell and Paul Simao)
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