The most recent personal consumption data solidifies the possibility of an interest rate cut in September. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditure (PCE) price index, came in lower than anticipated, further bolstering the case for the central bank to ease monetary policy and lower interest rates as early as September.
The PCE increased by 0.2 percent monthly, aligning with market expectations. Core personal consumption, excluding volatile food and energy components, remained steady at 2.6 percent, slightly below the market forecast of 2.7 percent. Goods prices decreased by 0.1 percent from a year ago, while services prices rose by 3.7 percent.
Motor vehicles and parts saw a significant increase in the goods category, while health care was the main driver of services inflation. Food prices rose by 0.2 percent, and energy costs edged up by 0.1 percent. Personal income rose by 0.3 percent last month, exceeding expectations, and personal spending increased by 0.5 percent, in line with market projections.
The personal savings rate in July was 2.9 percent, the second-lowest level since the global financial crisis 16 years ago. U.S. stocks maintained pre-market gains, with benchmark indexes rising by up to 0.7 percent.
Treasury yields mostly increased, with the 10-year yield remaining stable at 3.86 percent. The U.S. dollar index rose to 101.51, indicating a weekly gain of 0.8 percent.
Economist Peter Schiff believes that inflation will not reach the Fed’s 2 percent target and expects it to rise with upcoming rate cuts. Gary Black from The Future Fund LLC stated that the latest data solidifies a Fed rate cut in September, which is positive for equities.
The Fed relies on the PCE as its preferred inflation measure due to its comprehensive nature. Looking ahead, the Cleveland Fed’s Inflation Nowcasting model predicts a PCE of 2.4 percent and a CPI of 2.6 percent.
The downward trend in the PCE will likely support the Fed’s decision to cut interest rates in September. Fed Chair Jerome Powell has indicated a potential rate cut next month, citing a growing confidence in inflation returning to the 2 percent target.
Investors are pricing in quarter-point rate cuts at the last three meetings of 2024. The Fed’s focus is now on the labor market, with Powell emphasizing the importance of maintaining employment levels.
Regional central bank surveys have shown weaknesses in the labor market, with the Richmond metric being the weakest since 2009. The upcoming August jobs report will provide further insight into the state of the U.S. economy, with early estimates suggesting job creation and a decrease in the unemployment rate.
The July employment figures contributed to a sell-off in the stock market earlier this month, highlighting the importance of labor market conditions in shaping the Fed’s monetary policy decisions. Please rewrite this sentence.
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