Inflation data fuels speculation of Federal Reserve rate cuts
Recent economic data has sparked speculation that the Federal Reserve may cut interest rates sooner rather than later, as inflation remains stubbornly above the central bank’s 2% target.
Following Thursday’s encouraging inflation data, which showed a decrease in headline inflation month over month for the first time since May 2020, markets have been pricing in an 89% chance of a rate cut at the Fed’s September meeting, up from 75% just a day prior, according to data from the CME Group.
The latest data to support the case for rate cuts came on Friday, when the Bureau of Labor Statistics reported that the labor market added 206,000 nonfarm payroll jobs last month, exceeding economists’ expectations. However, the unemployment rate unexpectedly rose to 4.1%, the highest reading in almost three years.
Additionally, the Fed’s preferred inflation gauge, the core PCE price index, showed a slowdown in inflation in May. The year-over-year change in core PCE was 2.6% in May, in line with estimates and the slowest annual gain in over three years.
“The decline in the consumer price index between May and June strengthens the case for the Federal Reserve to begin cutting interest rates in September, particularly as the labor market has softened,” said Ryan Sweet, chief US economist at Oxford Economics.
However, Sweet cautioned against reading too much into the decline in CPI in June, noting that it may not be a new trend. Seema Shah, chief global strategist at Principal Asset Management, also believes that while the latest data points towards a September rate cut, a July cut is unlikely.
Shah explained, “Not only would it spark questions of ‘what do they know about the economy that we don’t know?’ but the Fed still needs to gather additional evidence of waning price pressures to be absolutely certain of the inflation path.”
As the debate over rate cuts continues, investors and economists will be closely watching for further developments in the coming months.
