A new reading of the Federal Reserve’s preferred inflation gauge showed Prices rose at a slower pace in May, advocates for lower interest rates this year.
But despite another positive signal that inflation is slowing after being higher than expected in the first quarter, the central bank is not expected to cut rates at its next meeting in late July.
The Fed will likely need more time and evidence that inflation is moving sustainably toward its 2% target, making an initial cut later in the year more likely.
“It gives them more confidence that they could cut rates if they needed to, but I don’t think they need to,” said Wilmer Stith, bond fund manager at Wilmington Trust, noting that economic growth is still strong.
âIt is too early to cut spending in the coming weeks.â
The personal consumption expenditures (PCE) index, excluding volatile food and energy prices, rose 2.6% in May, in line with expectations and down from 2.8% in April. This was the slowest annual growth in more than three years.
On a monthly basis, the inflation measure rose 0.1%, also in line with expectations and down from 0.2% in April. This monthly figure is
According to Paul Ashworth, chief North America economist at Capital Economics, the latest data puts the Fed on track to cut rates as soon as September.
Ashworth said he thinks there is a good chance core PCE inflation will fall to 2.5% in June and estimates second-quarter consumer spending is now tracking at just 1.6% after a disappointing 1.5% increase in the first quarter.
“Consumers appear to be…finally capitulating to the pressure of higher rates,” Ashworth said, adding that “the return to the prior disinflationary trend and the renewed weakness in real activity are both consistent with the Fed cutting interest rates as soon as possible this September.”
The Fed raised its inflation forecast at its latest policy meeting earlier this month to 2.8% from 2.6% previously and cut its forecast to one rate cut this year from three previously.
Ashworth said the Fed’s new inflation projection of 2.8% now appears “too pessimistic.”
Ahead of this morning’s inflation numbers, Atlanta Fed President Raphael Bostic said Thursday that the most recent inflation reports “offer signals that run counter to the ‘unwinding’ narrative” that took hold during the first quarter.
Bostic said he expected progress toward the Fed’s 2% inflation target to be slower than expected, but noted that inflation did not need to reach 2%. before reducing rates.
“Rather than holding the federal funds rate steady until we reach the target, I would prefer to cut the policy rate once I have more confidence that we are clearly on track to reach the 2 percent target,” he said.
Bostic still sees a rate cut in the fourth quarter, although he is not certain. He said he is considering scenarios for more cuts, no cuts or even an increase.
Fed Governor Michelle Bowman said Tuesday she did not think the Fed was “at the point where it is appropriate to lower the policy rate,” noting that she was prepared to raise rates at a future meeting if progress on inflation stalls or reverses course.
Bowman said inflation is still elevated and sees a number of upside risks to inflation, including geopolitical events that could disrupt global supply chains and the risk that increased immigration coupled with a strong labor market could push up core services inflation.
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