On Friday, the Bureau of Economic Analysis will release the updated Personal Consumption Expenditures (PCE) price index, often referred to as the Federal Reserve's preferred measure of inflation. As the Fed has kept rates higher for longer, parts of the US economy have had to adjust.

MacroPolicy Perspectives founder and president Julia Coronado joins Morning Brief to give insight into the upcoming PCE print, from its economic implications to its impact on future Fed policies.

Coronado says that the Fed risks "binding" implications in the housing sector without action on rate cuts: "When it comes to housing supply...high rates do impede supply. There still is excess supply of multifamily housing coming onto the market. This will be a full year of excess supply, more than likely, which is going to keep downward pressure on rents. The Fed is going to need to begin lowering rates soon if it doesn't want a more binding bottleneck in supply to materialize over the next couple of years. At these rates, we are not seeing interest in building housing, and we know we need more supply there, so I think it will be very constructive for the Fed to at least initiate a sequence of cuts."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

The next big catalyst for the Federal Reserve markets currently pricing in 65% chance of a September cut.

That's according to that CME said watch tool.

So how could Friday's P ce print that includes the Fed's preferred inflation metric impact the path forward for the central bank?

Joining us now to discuss, we've got Julie Coronado, founder and president of Macro policy perspectives to way.

And Julia thanks so much for being here with us this morning.

We really appreciate it.

Talk to me about what you're thinking is heading into Friday's P ce print.

If we do get that estimate that 2.6% what does that do to the chance of a September?

Yeah, thank you for having me.

Um I think, you know, we already have the May CP I there was a lot of broad based declines or Moderations in inflation there that it will show through to the P CE plus some of the other details we expect to be quite favorable as well.

So we could even see the annual rate round down to 2.5 it should be very close and that's more progress.

So the Fed has seen said it needs to see more progress so far.

What we've seen this year, even with the upside surprise to Q one, the monthly prints have been beating last year's monthly prints.

And so the annual rate keeps coming down and we expect that pattern to continue right through into the September FO MC meeting.

They'll have several more data prints in hand and we think that they're going to be favorable and that the fed will, you know, open the door in July and actually move forward with a cut in September.

It's progress and a pattern, but not the target.

We know, of course, for the fed.

Do you think that they need to change their target?

Well, the other thing, uh, well, actually, no, I think that the changing the target before we get to 2% would be something.

I mean, Chair Powell has been abundantly clear that he is not interested in doing that.

They are coming up on the strategy review this sort of, uh, every five years thing that they're going to be doing and they will re evaluate, uh, potentially something like the target.

Should it be a range?

Should it be a point estimate?

But I think that's not for now, for now.

They want to get close to and hit that target before they ever have discussions about, you know, changing it, that that would be a hit to their potential hit to their credibility.

You don't want to move the goalpost in the middle of the game.

Well, it's interesting the conversation about that upcoming debate about, you know, the feds tools because we recently got some housing data in that I want to get your take on Julia.

We're seeing housing starts not really there supply isn't there?

It's making prices sticky in the housing market.

How much will the dynamic between the feds rate hike cycle and the impact that has on housing potentially continue to weigh on something like core P CE moving forward?

And does that indicate kind of a sickness within the tools that the fed has given that raising rates keeps people locked into housing which then leads to inflation in other areas.

I'm just curious, you're thinking on that broader dynamic.

No, that's is a great question and really the fed, they have time but they are starting to get closer to those tradeoffs of is are your high rate policies actually gonna do more damage than good?

Uh You know, the, the the trade off they're facing, do you start a process earlier and go slowly?

So you can calibrate, what is the neutral rate?

Um versus waiting until the economy really weakens?

And we've seen a little bit of cooling in consumer spending, some cooling in the labor market.

I think so far, it's within the realm of what the fed wants to see.

But again, that means you're getting closer to where those tradeoffs might be binding in one direction or another when it comes to housing supply, that's an ex point because high rates do impede supply.

There still is excess supply of multifamily housing coming onto the market.

Really, this will be a full year of excess supply more than likely, which is going to keep downward pressure on rents.

But the fed is going to need to begin lowering rates uh soon if it doesn't want a more uh you know, binding bottleneck and supply to materialize over the next couple of years.

At this rate, these rates, we are not seeing interest in building housing and we know we need more supply there.

So uh I I think it will be very constructive for the fed to at least initiate a sequence of cuts.

They don't need to go all the way back down to zero.

But maybe un inverting the yield curve and getting mortgage rates to a point where we actually see movement in the housing market would be a very healthy development for the US economy.