A fresh reading on inflation Friday keeps the Federal Reserve on track to cut interest rates in September.
The annual change in the Fed’s preferred inflation gauge — the so-called core Personal Consumption Expenditures index — clocked in better than expected at 2.6% for the month of July, unchanged from June. Economists had expected 2.7%.
The month-over-month change in the measure, which strips out the costs of food and energy, held steady from June at 0.2%.
"This is as Goldilocks as it gets for PCE," said Jamie Cox, managing partner of Harris Financial Group. "The consumer remains strong and disinflation is clear in the data."
Quincy Krosby, chief global strategist for LPL Financial, said the new PCE print provides more proof to Fed officials who wanted to see additional confirmation of slowing inflation following hotter-than-expected readings in the first quarter.
It "should assuage concerns that the overall downward trajectory has stalled or inched higher," she said.
Fed Chair Jay Powell made clear last week that the central bank is poised to begin its rate-cutting cycle, saying in a speech that "the time has come for policy to adjust."
Minutes from the Federal Reserve’s July policy meeting also showed several members of the central bank felt a case could have been made to cut rates then.
The vast majority of officials at that July meeting thought if data continued to come in as expected, it would be appropriate to ease policy at their next meeting on Sept. 17-18. If it happens, it would be the Fed's first cut since 2020.
Now, the question becomes how big that first cut might be. Powell was mum on the timing and pace of easing when he spoke last week.
Markets are pricing in a nearly 70% chance the Fed will cut by a quarter percentage point.
The data that could determine whether the central bank slashes rates by half a percentage point is the next jobs report due out Sept. 6. If unemployment continues to rise, an argument could be made that the Fed should move more aggressively.
The PCE reading on Friday helps support the argument for a smaller 25 basis point cut, Jose Torres, Interactive Brokers senior economist, told Yahoo Finance.
"I think as the Fed walks down the monetary policy stairs, it is going to be a slow walk," he said.
Powell and other Fed officials have been clear they are now more worried about a weakening job market than inflation.
"The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions," Powell said last week.
The question for policymakers to wrestle with in the coming weeks is whether a jump in the unemployment rate to 4.3% in July was due to exogenous factors like the impact of a Texas hurricane at the time, or whether it’s the start of a more worrisome trend.
Alan Blinder, former vice chair of the Federal Reserve and professor of economics at Princeton University, told Yahoo Finance the job market can’t cool "too much more" without a recession.
"[The unemployment rate] has been going up smoothly — a tenth of a point. You don’t want to keep that up for a year. If you do that, you’re up 1.2 percentage points," he said in an interview.
The income numbers in Friday's PCE release should ease any concerns about an imminent downturn, said Capital Economics chief North America economist Paul Ashworth.
"The July income and spending report shows price pressures remaining muted despite the strength of real consumption," Ashworth wrote in a note.
"Even allowing for the unexpected strength of imports, GDP growth is tracking at close to 2.5%, which should ease any lingering recession fears."
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