Will US PCE Data Push for a Rate Cut in September?

On Friday local time, the United States will release the Personal Consumption Expenditures (PCE) price index for May. The Federal Reserve maintained interest rates unchanged at its June meeting, and the dot plot indicated that there might only be one rate cut this year. Recently, the tone of speeches by Federal Reserve officials has been generally cautious, and combined with the fluctuating economic data, the timing of the start of the easing cycle has once again become uncertain. Market expectations are that the May PCE could further decline, and whether this could become a stepping stone to confirm a rate cut in September will undoubtedly attract outside attention.

Inflation indicators may further cool down.

The PCE price index is one of the inflation indicators that the Federal Reserve pays the most attention to.

Previously released data showed that the U.S. Consumer Price Index (CPI) for May unexpectedly remained unchanged month-on-month. After stable data was announced in February and March, the CPI has once again shown a downward trend. At the same time, last month's Producer Price Index (PPI) decreased by 0.2% month-on-month, and the easing of upstream cost pressures is also expected to gradually be passed on to the downstream consumer end.

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According to forecasts from Wall Street institutions, the year-on-year growth rate of the U.S. PCE in May will decrease from the previous 2.7% to 2.6%, with a month-on-month growth rate of 0.1%. The core PCE, which excludes energy and food, has a year-on-year growth rate of 2.7%, continuing to hit a new low in nearly three years, with a month-on-month growth rate falling back to 0.1%, reaching a low since December last year.

Federal Reserve officials are closely monitoring changes in service prices within core inflation to measure their progress in combating inflation. Sub-indicators of the CPI show an increase in healthcare costs, while auto insurance costs, one of the main drivers of core inflation, have decreased. Airfare and communication prices have also retreated, and rent pressure remains.

BK Asset Management's macro strategist, Boris Schlossberg, said in an interview that most of the year-on-year increase in core inflation is attributed to inflation in certain service categories. The decline in auto insurance prices is a potential sign that the momentum of insurance companies raising premiums is weakening. On the other hand, it is still uncertain when to wait for further slowing of housing rents.

At the same time, Schlossberg believes that the Federal Reserve may start to pay more attention to the labor market because, in this situation, inflation is more sticky than expected.

Also announced alongside the PCE are the monthly rates of personal income and personal expenditure. Both are of significant reference value for predicting future price trends. Consumer spending accounts for more than two-thirds of U.S. economic activity, and the weakening of income expectations helps to curb the upward pressure of demand on inflation.Wells Fargo stated in a report sent to journalists that the pressure on retail sales indicates that consumers may be feeling some fatigue from spending. Consumer expenditures appear to be becoming more selective, with the growth in the purchase of necessities beginning to outpace that of non-essentials. The weakness in the leisure economy, as seen from restaurant sales, suggests that consumers are gradually losing confidence.

Wells Fargo believes that, in conjunction with strong employment and wage growth in May, broad real personal spending will increase by 0.3%, which means that consumers have not lost confidence, and income growth once again serves as additional liquidity for household purchasing power, with personal income forecasted to grow steadily by 0.4%.

Schlossberg told reporters that consumer spending is slowing down, and due to the presence of high interest rates, some consumers' credit is limited. However, with the expectation that the unemployment rate will remain low throughout the year, the overall condition of household balance sheets still appears strong, and it is anticipated that consumer spending growth will maintain a pace close to the current rate in the second half of the year.

The Federal Reserve is expected to remain patient.

For the Federal Reserve, the overall economic resilience and inflation higher than expected mean that restrictive monetary policy still needs to be maintained.

The negative impact of high prices seems to have taken effect, with the University of Michigan's early reading of consumer sentiment in June falling to the lowest level in seven months, reflecting lingering concerns about inflation and a slowdown in household income growth. The Conference Board's consumer confidence index, which was released this week, also continued to decline.

Since the last meeting, Federal Reserve officials have indicated that, although they are encouraged by the decline in other inflation data, including the Consumer Price Index, they need to see more of this progress before considering a rate cut. The general stance of officials, including Federal Reserve Chairman Powell, has been that it is inappropriate to lower the target range until there is greater confidence in inflation moving sustainably toward 2%.

It is worth mentioning that Randal Verbruge, a senior research economist at the Federal Reserve Bank of Cleveland, which is the headquarters for Federal Reserve inflation research, recently warned that his model shows that the inflation rate will still be above the 2.7% target by the second quarter of 2025 and will only approach but slightly exceed 2% by the middle of 2027.

Federal funds rate futures pricing shows that there is still some distance to go for a full pricing of a rate cut in September, with the market expecting about a 60% chance of two rate cuts within the year.

Bob Schwartz, a senior economist at Oxford Economics, said in an interview that he expects the Federal Reserve to act twice, in September and December. The strength of the labor market gives the Federal Reserve time to wait for good news on inflation before signaling a rate cut, but the Federal Reserve needs to act cautiously. Historical experience indicates that if it waits for specific evidence that the labor market is bending, it will be too late.In comparison, Barclays and Bank of America still maintain a degree of caution regarding a rate cut in December. Bank of America economist Michael Gapen pointed out that the disinflationary trend remains the most likely path for prices to follow. "However, we believe that the Federal Reserve needs to see more than just one or two favorable inflation data points to gain enough confidence to reverse policy," he added.