The recent announcement of a stable personal consumption expenditures (PCE) index in May has provided new evidence for a potential Federal Reserve (Fed) interest rate cut in September. According to the US Commerce Department, PCE in May was the same as in April, the first time since November 2023. Additionally, PCE rose by 2.6% compared to the same period last year, slightly lower than the previous month’s increase of 2.7%.
One significant aspect of this report is that excluding food and energy prices, core inflation rose just 0.1% from April to May, the slowest increase since spring 2020. This also represents an increase of only 2.6% year-on-year, the lowest in three years. The Fed typically prefers PCE over the Consumer Price Index (CPI) when measuring inflation because of its ability to account for changes in spending habits as prices rise.
Chief US economist at BMO Capital Markets, Scott Anderson, described this recent report as “very friendly” to the Fed and could support a rate cut in September while maintaining investor confidence in sustainable economic growth. Despite concerns about inflation, recent data suggests that the economy’s growth momentum may be faltering with first-quarter GDP reaching only 1.4%, which is the slowest rate since 2023.
Economists believe at least one Fed rate cut may be necessary this year given these signs of slowing inflation and economic growth. Currently, interest rates stand at a record high after 11 hikes aimed at curbing inflation. If inflation stabilizes over the coming months, it’s possible that the Fed will feel confident enough to continue cutting rates before September.
According to CME’s FedWatch statistical tool, investors have increased their predictions for a rate cut in September from around 58% before May’s PCE release to around 61.1% after it was announced.
In summary, while concerns about inflation remain high on Wall Street and Main Street alike, recent reports suggest that economic growth may not be as robust as initially predicted this year. As such, many experts believe that a potential Fed interest rate cut may be necessary to keep economic growth on track and prevent further inflationary pressures from taking hold.