The latest Personal Consumption Expenditures (PCE) data for May came in line with analyst expectations, with a reading of 2.6%. To understand the implications for future Federal Reserve rate cuts, BMO senior economist and managing director Jennifer Lee joins Morning Brief to offer her insights.

Lee describes the PCE data as "the best one can expect," suggesting it should bolster the Fed's confidence in easing monetary policy. She notes a "softness" in services spending, which she views positively as it may help cool the previously sticky services inflation. Despite this, Lee observes that consumers continue to spend on discretionary items.

Based on this report, Lee anticipates a potential Fed rate cut in September. She explains, "Over the next couple of months, we'll accumulate more inflationary data. This PCE report is one of the more significant pieces we've seen since the May CPI. We need to see all inflation indicators aligning, which will give the Fed the comfort and confidence to start cutting rates in September."

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

This post was written by Angel Smith

Video Transcript

Take a quick look at treasury yields moving lower.

After the latest economic data, P ce personal consumption expenditures data was in line with estimates investors eagerly awaiting the fed's next move on interest rates.

Now, the CME fed watch tool showing 67% probability of a rate cuts to come in September for more on this, we're joined by Jennifer BMO, senior economist and managing director here and Jennifer, of course, we're beginning with this this morning just as we're thinking about what the market activity may look like as we round out this the final trading session of the first half here and what this really signals for the fed in their own pathway going forward here.

Does this move the dial?

Um Good morning and thank you very much for having me on, you know, this, I I'm gonna say that this report itself was probably the best that, you know, one can expect.

Um And it certainly helps the FED I think give them a little bit more comfort um on their path to starting to ease policy which we still expect to start happening in September.

Um You know, I mean, obviously you guys just went through the headlines, you know, with a, uh, with a, with a 0.5% increase in incomes and, uh, and 0.2% in spending.

But when you're dr drilling it down a little bit further, it was actually a little bit better.

As I, as I, I've been as, as I'm trying to say right now, you know, also that we were starting to see some softening on services spending.

We've had two straight months of real spending of 0.1% which is quite modest.

Um And it's actually not a bad thing because that's where all the stickiness of inflation has been coming in.

So we start seeing some pull back or some cooling off and spending on uh in the services side that will help cool the stickiness of ins or unstick the stickiness of inflation so that I think was a was a good, but at the same time, consumers weren't pulling back completely.

They're still spending on discretionary items like recreational goods and vehicles and recreational services.

So it shows that not everyone is terribly worried just yet, but we are starting to see some pull back on things like dining out.

So, you know, so there's some paring back, bottom line in all this, there's some pairing back pulling in services spending which will help the services CP I um uh eventually start moving downward.

And I think this is all good news for the fed, allowing them to exhale a little bit and again, continue hopefully on that pace, that path or a brief cut to cut in September?

So Jennifer.

Ok.

So that's what I was going to ask you there, the timing then of that rate rate cut here.

Do you think it's more likely that the fed is going to act then in September?

Yes, I think so.

I mean, there, you know, obviously we have that strong or that very encouraging may CP I number.

And as the chair Powell said, you know, it's a good number, but we need more of them.

And you know, so over the next couple of months, you know, we're going to start accumulating more inflationary data.

This is probably one of the the bigger pieces that we saw since that May CP I and uh you know, we need to see all the different inflation indicators all pointing in the same direction and that will give the fed um the comfort and the confidence it needs to start cutting rates in September.

But Jennifer, do you think it's more likely though that the fed is going to on the side of caution here, we talk about the risk here still to inflation that we could see inflation rise just a bit.

We talk time and time again about how this path forward for inflation is likely to be bumpy.

Then.

Wouldn't that though strengthen the argument that hey, maybe it still makes sense even though we have seen this progress.

We are starting to see this disinflation that it still makes sense maybe for the fed to wait several months before cutting.

So we still have, you know, a few more months before September rolls around and, and, um, and for sure, I mean, if we had to, we're always asked, you know, like right now we have officially two rate cuts for the fed in September and December.

And, you know, we're always asked, you know, if you had to lean, which way, you know, which way would you be going?

And we would sort of say that, you know, with their, on the side of caution as you just point out and do fewer, I guess.

Um, but again, we still have a few more months of, uh, of data to consume and, and, and to analyze and, uh, you know, again, everything is nothing goes down in a straight line and the path to, you know, 2% is going to be bumpy.

But as, as long as everything is pointing in that same general direction, you know, I don't think it will at least pave the way for at least the first rate cut to come.

The Fed likes to look and, and continue to carry the fact that it should be a political to what extent do you believe that that factors into their thinking as well here trying to dodge any kind of closeness or proximity to the general election.

Um, it's it's, it's, it's tough and this is like, you know, Fed's not alone, you know, we've got, you know, the Bank of England, for example, like dealing with that their next election coming up, um, next week.

Um, so we've got, for example, like the, that's where we have the Bank of England, um, you know, holding off until after the election and among other reasons as well, you know.

Um, so I think the, the, the, the Federal Reserve is very cautious, um, um, on that front trying to, as you say, you know, dodge any, um, uh, you know, any bullets that could potentially coming from, from, from this election.

But, you know, we do have them pausing in November just to see how things fall out, uh, before moving again in December.

All right, Jennifer Lee BMO, a senior economist and managing director.

Thanks so much.