Inflation about as expected – and that’s probably good enough.
The June Personal Income and Outlays report for June showed that consumer spending remained solid, although income was a bit lower than expected. But the key figures were the PCE and core PCE inflation measures.
The overall PCE price index rose by 0.1 percent in June, exactly what markets expected. The 12-month trend rate slowed to 2.5 percent, getting closer to the Fed’s longer-term goal of 2.0 percent. The core PCE price index (removing the volatile food and energy components) increased by a touch more – up by 0.2 percent for the month. While this was about equal to market expectations (some surveys showed 0.1 percent and others 0.2 percent), the trend rate remained unchanged at 2.6 percent.
Implications for the Fed:
Broad measures of inflation continue to slowly edge lower and are now close to the Fed’s forecasts for where they would be at year-end. Is this enough to get the Fed to ease monetary policy? Not at next week’s FOMC meeting, as the Fed prefers not to surprise financial markets and according to the CME, there is less than a 7 percent chance of a 25 basis point cut in the federal funds rate then. But if inflation edges down still more before the September FOMC meeting, then the Fed is likely to start easing policy then.
What could cause the Fed to stay on the sidelines in September? First, that meeting date is getting close to the November elections and the Fed does not want to be seen as responding to political pressures. Second, the inflation figures may not move lower between now and then (although they are probably low enough now so that even trend rates that are still around 2.5 percent then will be enough). And third, if there are signs of a reacceleration of the economy (as in the first reading of the second quarter GDP report).
If the Fed intends today to ease in September (knowing that conditions could change), it is likely that Fed Chair Powell give some strong indications that a near-term cut in rates are coming (with other FOMC members reinforcing this in coming weeks).
Two final points: (1) the next Fed easing is likely to be the first of several, rather than a one-off; (2) Fed policy acts on the economy with a lag, so we don’t expect any meaningful impact from Fed easing starting this fall until next summer at the earliest – but the impact on financial markets will be much faster.
David W. Berson, Ph.D.
Chief US Economist
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