Downshifting U.S. Inflation May Hasten Fed Rate Cut

The runway toward a Federal Reserve interest-rate cut will come more into focus in the coming week amid fresh signs inflation is abating and economic activity is simmering down, Vince Golle and Craig Stirling reported for Bloomberg News.

Forecasters see a 1.9% annualized rate after a 1.4% pace in the first three months of the year.

Economists expect the personal consumption expenditures (PCE) price index minus food and energy — due on Friday — to have risen 0.1% in June for a second straight month.

That would bring three-month annualized core inflation down to the slowest pace this year, and below the Fed’s 2% target. The report on monthly inflation, part of a reading on personal spending and incomes, will follow the government initial estimate of second-quarter gross domestic product (GDP).

Forecasters see a 1.9% annualized rate after a 1.4% pace in the first three months of the year.

That would mark the slowest consecutive quarters of economic activity in two years and, combined with moderating job and wage growth, gives Fed policymakers scope to begin easing.

US central bankers next meet on July 30-31, and while the chances of a rate cut then are low, investors see a quarter-point reduction at their September meeting as a virtual lock.

Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou and Chris G. Collins of Bloomberg Economics say “The June PCE inflation data will likely offer encouraging news for the Fed. The monthly pace of core PCE inflation, the Fed’s preferred price gauge, will likely be consistent with the 2% target for a third consecutive print."

"With the labor market cooling, personal income growth slowing, and consumers becoming more discerning in their spending habits, we think the stage is set for a September rate cut,” they concluded.