A new reading of the Federal Reserve’s favorite inflation gauge showed prices rose at a slower pace in May, raising the case for rate cuts this year.
But despite another positive sign that inflation is easing after being higher than expected in the first quarter, the central bank is unlikely to cut rates at its next meeting in late July.
The Fed likely needs more time and evidence that inflation is coming down sustainably to its 2% target, making it more likely that the first rate cut will come later this year.
“It gives them more confidence that if they need to, they can cut rates, but I don’t think that’s necessary,” said Wilmer Stith, bond fund manager of Wilmington Trust, who noted that economic growth is still strong.
“It is too early to make cuts in the coming weeks.”
The Personal Consumption Expenditures (PCE) index, which excludes volatile food and energy prices, rose 2.6% in May, in line with expectations and down from 2.8% in April. That was the slowest annual growth in more than three years.
On a month-on-month basis, the inflation measure rose 0.1%, also in line with expectations and down from 0.2% in April. That monthly figure is the
The Fed is on track to cut rates as early as September, according to Paul Ashworth, chief North America economist at Capital Economics.
Ashworth said he thinks core PCE inflation is likely to fall to 2.5% in June and estimates consumer spending is now just 1.6% in the second quarter, after a disappointing 1.5% increase in the first quarter.
“Consumers appear to be … finally capitulating to the pressure of higher interest rates,” Ashworth said, adding that “the return to the previous disinflationary trend and the newfound weakness in real activity are both consistent with the Fed cutting interest rates as early as September.”
The Fed at its latest policy meeting earlier this month raised its forecast for inflation from 2.6% to 2.8% and lowered its forecast to one rate cut this year, down from three previous cuts.
Ashworth said the Fed’s new inflation forecast of 2.8% now looks “too pessimistic.”
In preparation for this morning’s inflation data, Atlanta Fed Chairman Raphael Bostic said Thursday that the latest inflation reports “provide signals that contradict the narrative of ‘stagnation’ that emerged in the first quarter.”
Bostic said he expected progress toward the Fed’s 2% inflation target to come more slowly than previously hoped, but noted that inflation doesn’t have to get all the way to 2% before rates are cut.
“Rather than leave the federal rate unchanged until we reach the target, I would choose to lower the policy rate once I feel more confident that we are clearly on track to the 2 percent target,” he said.
Bostic is still eyeing a rate cut in the fourth quarter, although he is not committed to it. He said he could see scenarios for more cuts, no cuts or even an increase.
Fed Governor Michelle Bowman said Tuesday she did not believe the Fed was “at a point where it is appropriate to cut the policy rate,” noting that she was prepared to raise rates at a future meeting if progress on inflation stalls or reverses.
Bowman said inflation is still high and sees a number of upside risks to inflation, including geopolitical events that could disrupt global supply chains and the risk that an increase in immigration combined with a strong labor market could drive inflation in core services can increase.
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