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Inflation has remained stubbornly above the Federal Reserve’s 2% target on an annual basis. But recent economic data has helped fuel a narrative that the central bank should cut rates sooner rather than later.
Immediately after Thursday’s encouraging inflation data, which showed headline inflation fell month-over-month for the first time since May 2020, markets were pricing in a roughly 89% chance the Federal Reserve would start cutting rates at its September meeting, up from 75% the day before. according to data from the CME Group.
The data is the latest to support the Fed’s rate cuts.
On Friday, the Bureau of Labor Statistics showed the labor market added Nonfarm payrolls rose 206,000 jobs last month, ahead of the more than 190,000 expected by economists. However, the unemployment rate unexpectedly rose to 4.1%, up from 4% the previous month. It was the highest reading in nearly three years.
Notably, the Fed’s preferred inflation gauge, the so-called core PCE price index, showed inflation slowing in May. The year-over-year change in core PCE reached 2.6% year-on-year in Mayin line with estimates and the slowest annual gain in more than three years.
“The decline in the consumer price index between May and June will not persist, but it strengthens the case for the Federal Reserve to start cutting interest rates in September, especially as the labor market has weakened,” wrote Ryan Sweet, chief U.S. economist at Oxford Economics.
Still, the economist cautioned: “We are cautious about placing too much emphasis on the decline in CPI in June and do not believe this is the new trend.”
Seema Shah, chief global strategist at Principal Asset Management, agreed that the latest numbers “put us firmly on track for a Fed rate cut in September,” but said “a policy cut in July is still out of the question.”
“Not only would this raise questions like ‘what do they know about the economy that we don’t?’, but the Fed still needs to gather additional evidence of easing price pressures to be absolutely certain about the path of inflation.”