On PCE inflation in the US. Bret Kenwell, an investment analyst in the US, points out that the PCE data gives investors confidence that the Fed will be able to begin cutting rates. However, remember that the central bank will need “more than one month of more or less controlled inflation results.”
In his opinion, the body chaired by Jerome Powell “will need to see a sustainable trend towards lower inflation to feel confident enough to lower rates without seeing a rebound in inflation. We're not there yet, but the May inflation reports were a constructive first step.”
Earlier this month, investors became more confident in a rate cut by the Fed following a favorable CPI report. Now, with PCE data in line with economists' expectations, investors can feel more confident on this front.
While we don't necessarily want to see consumer weakness, easing retail spending should help fan the flames of lower rates in the second half of 2024. Ultimately, the Fed will lower rates in two ways. Either the economy weakens to the point of needing looser financial conditions or inflation cools. There is an obvious preference for the latter.
Remember that the Federal Reserve will need more than one month of more or less controlled inflation results. You will need to see a sustainable trend towards lower inflation to feel confident enough to lower rates without seeing a spike in inflation. We're not there yet, but the May inflation reports were a constructive first step.
Durable goods continued to show weakness, while inflation in services - such as housing and healthcare - remained a sticking point in the PCE report. For the Fed to beat inflation, it will have to see services inflation begin to soften.
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