The latest data on the Fed's preferred inflation gauge shows that U.S. prices rose less than expected in August, potentially paving the way for further rate cuts by the Federal Reserve through the end of this year and into the next.
The core Personal Consumption Expenditures (PCE) price index, which excludes food and energy prices and is closely monitored by the Fed, rose 0.1% in August on a monthly basis. This was below Wall Street's expectation of 0.2% and July's increase of 0.2%. On an annual basis, core PCE prices rose 2.7%, meeting Wall Street forecasts but higher than July's 2.6%.
The overall PCE annual growth rate slowed to 2.2%, below the expected 2.3%, while its monthly growth rate remained flat at 0.1%.
Other data indicates that U.S. consumer spending grew moderately in August, suggesting that the economy retained some robust momentum in the third quarter as inflation pressures continued to ease. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by 0.2% last month, compared to an unrevised 0.5% growth in July. This fell short of market predictions for a 0.3% growth.
Following the data release, gold edged up and hovered around $2,670, and the U.S. dollar index approached the 100 mark.
U.S. short-term interest rate futures climbed after the PCE inflation data was released, reflecting rising market expectations for further Fed rate cuts. Futures traders see a slightly higher chance of a 50 basis-point rate cut in November over a 25 basis-point cut—with a 54% probability for the former and a 46% probability for the latter.
Regardless of the specific outcome, traders are betting that policy rates will be lowered by 75 basis points by the end of the year. Currently, the Fed's policy rate stands between 4.75% and 5.00%.
This report is the first inflation data released since the Fed cut rates by 50 basis points on September 18. Fed Chair Jerome Powell noted in a post-decision press conference that the Fed is now "more confident" about inflation moving towards the 2% target.
Powell highlighted that a cooling labor market is now as much a concern for the Fed as inflation. Powell stated, “Inflation risks have indeed decreased, and employment risks have risen. Since we have been patient and refrained from taking any rate-cut action—despite the decline in inflation—I believe we are now in a very favorable position to manage the risks to our dual mandate.”
Recent reports indicate that the economy is still expanding at a healthy pace. On Thursday, the U.S. government confirmed its previous forecast that the U.S. economy grew at an annualized rate of 3% in the second quarter, driven by strong consumer spending and business investment.
Several individual economic indicators also give reassurance. Last week, U.S. jobless claims dropped to their lowest level in four months.
