Fed’s Favorite Inflation Gauge Holds Steady, Rate Cut Outlook Unaffected

The PCE report shows inflation continues to rise moderately, while household spending remains stable, reinforcing the outlook for a soft landing. Analysts expect the data will not affect the Fed's anticipated rate-cut trajectory.

Data released on Friday showed that the Federal Reserve's preferred inflation gauge rose at a moderate pace in July, with household spending holding steady. This suggests that policymakers have so far managed to curb price pressures without causing significant pain to consumers, achieving a soft landing. Consequently, the likelihood of a 50-basis-point rate cut by the Fed in September has diminished.

In July, the U.S. Core PCE Price Index increased by 2.6% year-over-year, matching the previous month's figure and slightly below the market expectation of 2.7%. On a monthly basis, it remained at 0.2%, in line with expectations. The U.S. PCE Price Index rose by 2.5% year-over-year in July, below the expected 2.6% and unchanged from the previous month's 2.5%. Monthly, it rose from 0.1% to 0.2%, as expected. U.S. personal spending increased by 0.5% month-over-month in July, up from 0.3% in June, meeting expectations.

Following the release of the PCE data, spot gold fell by $6, the dollar index rose by 16 points, and U.S. short-term interest rate futures edged down. U.S. stock index futures rose slightly.

Analysts noted that U.S. personal income and spending data were generally positive, with income and real spending slightly better than expected. The overall price index was in line with expectations, while the year-over-year change in core prices was slightly lower than economists' forecasts. The monthly super core services inflation rate was 0.21%, consistent with May and June.

One analyst commented that, overall, there is nothing to prevent the Fed from cutting rates next month. However, for the same reasons, there is also no evidence to suggest a 50-basis-point rate cut is warranted. Therefore, these data are unlikely to cause significant fluctuations as the end of the month approaches, especially with employment data due to be released a week later.

U.S. consumer spending grew robustly in July, indicating that the economy remained on solid footing at the start of the third quarter, which does not support arguments for a significant rate cut by the Fed next month.

After the unemployment rate jumped to a nearly three-year high of 4.3% in July, concerns about the health of the U.S. economy arose, prompting some calls for the Fed to cut rates by 50 basis points in September. However, policymakers also noted that the slowdown in the labor market was primarily due to reduced hiring rather than layoffs.

Most economists still believe that the Fed will refrain from a 50-basis-point rate cut, as the economy continues to grow strongly and inflation, though significantly slowed, remains above the 2% target.

Vanguard Chief Economist Joe Davis expects that July's PCE data will not affect the Fed's anticipated rate-cut trajectory. He believes the Fed will cut rates by 25 basis points at its September and December meetings this year.

Fed Chair Jerome Powell stated last week that the time has come for the Fed to lower its key policy rate. He affirmed the expectation that Fed officials will begin reducing borrowing costs next month and made it clear that he intends to prevent further cooling in the labor market.

Francesco Pesole, an analyst at ING, noted that the largest part of the dollar's decline may have already occurred due to the market's confidence in the Fed's easing policy. Additionally, the upcoming U.S. Labor Day holiday on Monday may also support Friday's range trading.

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