The recent announcement that the Personal Consumption Expenditures (PCE) index remained unchanged in May has given a boost to the case for a potential Fed rate cut in September. According to data from the US Department of Commerce, PCE in May was the same as in April, marking the first time since November 2023. Additionally, while PCE increased by 2.6% compared to the same period last year, this represents a slight decrease from the previous month’s increase of 2.7%.
Despite concerns over inflation, signs of slowing economic growth are becoming increasingly evident. For example, the first quarter GDP reached 1.4%, its slowest rate since 2022. However, when excluding food and energy prices, core inflation only rose by 0.1% from April to May – the smallest increase since spring 2020. This also represents a decrease of 2.6% compared to the same period last year – the lowest increase in over three years.
The Federal Reserve (Fed) typically prefers using the PCE index over other inflation measures like the Consumer Price Index (CPI), as it accounts for changes in consumer spending habits as prices rise. With this in mind, economists believe that at least one Fed rate cut could be necessary this year if inflation continues to stabilize over time. Interest rates are currently at a record high following 11 hikes aimed at controlling inflation, but if inflation remains under control over the next few months, then investors may start predicting a rate cut earlier than expected.
Chief US economist at BMO Capital Markets, Scott Anderson, described recent developments as “very friendly” for potential Fed cuts in September while maintaining investor confidence in sustained economic growth.
With these factors taken into account and with an eye on keeping investors informed about future economic developments, economists are closely watching market trends and predicting that at least one Fed rate cut could be necessary this year if inflation continues to stabilize and economic growth slows down further.
Overall, while there is still some debate among economists about whether or not a Fed rate cut will happen this year or not; most agree that if inflation continues to stabilize and economic growth weakens further then it might become necessary for policymakers to adjust monetary policy again through interest rates cuts to keep up with global market trends and avoid any long-term negative consequences for their economy.
