A new reading from the Federal Reserve’s preferred inflation gauge showed prices rose at a slower pace in May, helping the case for interest rate cuts this year.
But despite another positive sign that inflation is easing after it was hotter than expected in the first quarter, the central bank is unlikely to cut rates at its next meeting in late July.
The Fed will likely need more time and evidence that inflation is moving steadily toward its 2% target, making the first rate cut later in the year more likely.
“It gives them more confidence that if they needed to, they could cut rates, but I don’t think they need to,” said Wilmington Trust bond fund manager Wilmer Stith, noting that economic growth is still strong.
“It’s too early to cut into the next two weeks.”
Read more: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
The Personal Consumption Expenditure (PCE) index, excluding volatile food and energy prices, rose 2.6% in May, in line with expectations and down from 2.8% in April. That marked the slowest annual gain in more than three years.
On a monthly basis, the measure of inflation rose by 0.1%, also in line with expectations and down from 0.2% in April.
The latest reading puts the Fed on track to cut in September, according to Paul Ashworth, chief North American economist for Capital Economics.
Ashworth said he thinks there’s a good chance core PCE inflation will fall to 2.5% in June and estimates second-quarter consumer spending is tracking at just 1.6% now after a disappointing 1.5% gain in the first quarter. .
“Consumers appear to be finally capitulating to the pressure of higher rates,” Ashworth said, adding that “the return to the earlier disinflationary trend and the newfound weakness in real activity are both consistent with rate cuts interest from the Fed just this September”.
The Fed raised its outlook for inflation at its last policy meeting earlier this month to 2.8% from 2.6% previously and trimmed its forecast to one rate cut this year from three previously.
Ashworth said the Fed’s new inflation projection of 2.8% now looks “very pessimistic”.
Ahead of this morning’s inflation reading, Atlanta Fed President Raphael Bostic said Thursday that the latest inflation reports “offer signals that push against the ‘stagnation’ narrative” that took hold during the first quarter.
Bostic said he expected progress toward the Fed’s 2% inflation target to come more slowly than previously expected, but noted that inflation did not need to reach 2% before cutting rates.
“Rather than holding the federal funds rate steady until we are on target, I would favor lowering the policy rate once I gain additional confidence that we are clearly on track to the 2% target,” he said.
Bostic is still looking for a rate cut in the fourth quarter, though he’s not locked into it. He said he could see scenarios for more cuts, no cuts, or even increases.
Fed Governor Michelle Bowman said on Tuesday that she did not believe the Fed was “at the point where it is appropriate to cut the policy rate,” noting that she is willing to raise rates at an upcoming meeting if progress in inflation stops or changes course.
Bowman said inflation is still elevated and sees a number of upside risks to inflation, including geopolitical events that could disrupt global supply chains and a risk that an increase in immigration coupled with a strong labor market could boost inflation. of basic services.
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