Inflation has remained stubbornly above the Federal Reserve’s 2% annual target, but recent economic data has stoked the view that the central bank should cut interest rates sooner rather than later.
Strong inflation data on Thursday showed headline inflation fell month-on-month for the first time since May 2020, leading markets to price the probability of the Federal Reserve starting to cut interest rates at its September meeting at about 89%, up from 75% the previous day. According to CME Group data,.
The data is the latest to support the Fed’s interest rate cut.
on friday, Bureau of Labor Statistics The labor market expanded by 206,000 nonfarm payrolls last month, beating economists’ expectations of more than 190,000, but the unemployment rate unexpectedly rose to 4.1%, the highest level in nearly three years, from 4% the previous month.
Notably, the Fed’s preferred inflation measure, the so-called core PCE price index, showed inflation easing in May. The year-over-year change in core PCE in May was in line with expectations, marking the slowest annual rate of increase in more than three years.
“While the decline in consumer prices from May to June is unlikely to persist, the case for the Fed to begin cutting rates in September strengthens, particularly given the softening labor market,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote.
Still, the economist cautioned against “overinterpreting the decline in June’s CPI and does not believe it represents a new trend.”
Seema Shah, chief global strategist at Principal Asset Management, agreed that the latest figures “firmly point the way towards a Fed rate cut in September,” but said “a July policy cut is still off the table.”
“Not only does it raise the question, ‘What does the Fed know about the economy that we don’t?’ but the Fed needs to gather more evidence that price pressures are weakening before it can be absolutely certain about the trajectory of inflation.”
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