Inflation has remained stubbornly above the Fed’s 2% target on an annualized basis, but recent economic data has helped fuel the narrative that the central bank should cut interest rates sooner rather than later.
Immediately after Thursday’s encouraging inflation data, which showed headline inflation fell on a monthly basis for the first time since May 2020, markets were pricing in an 89% chance that the Fed would start cutting interest rates at its September meeting, up from 75% the day before. According to CME Group data.
This is the latest data to support the case for a rate cut by the Federal Reserve.
Friday, Bureau of Labor Statistics Official data showed the labor market added 206,000 nonfarm jobs last month, beating economists’ expectations for 190,000. However, the unemployment rate unexpectedly rose to 4.1%, up from 4% the month before. That was the highest rate in nearly three years.
Notably, the Fed’s preferred inflation gauge, the core PCE price index, showed inflation slowing in May. The annual change in the core PCE index came in at 2.6% from a year earlier in May, in line with estimates and the slowest annual gain in more than three years.
“The decline in CPI between May and June will not be sustained, but it strengthens the case for the US Federal Reserve to start cutting interest rates in September, especially with the weak labor market,” wrote Ryan Sweet, chief US economist at Oxford Economics.
However, the economist cautioned: “We caution against reading too much into the June CPI decline, and we do not believe this is a new trend.”
Seema Shah, chief global strategist at Principal Asset Management, agreed that the latest figures “put us firmly on track for a Fed rate cut in September,” but said that “a July policy cut is still out of the question.”
“Not only will this raise the question of ‘what do they know about the economy that we don’t?’, but the Fed still needs to gather additional evidence of easing price pressures to be absolutely certain about the path of inflation.”
Read more about the latest CPI data here.
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