Fed seen poised for rate cut as inflation cools

Federal Reserve policymakers on Friday got fresh confirmation that inflation is continuing to ease, clearing the way for a first interest rate reduction next month as they shift their focus to preventing further cooling in the labour market.

The personal consumption expenditures (PCE) price index rose 2.5% in July from a year earlier, the Commerce Department reported, matching the gain in June. Over the most recent three months, the annualized reading on the Fed’s preferred gauge of inflation is well below its 2% goal.

Fed Chair Jerome Powell said last week that “the time has come” to cut rates, after a battle with decades-high inflation that saw the US central bank raising rates aggressively in 2022 and 2023. It has kept its policy rate in the 5.25%-5.50% range since last July.

“The recent price trends confirm that the end of the Fed’s inflation fight is coming into view,” assuring a rate cut at the Sept. 17-18 policy meeting, Ben Ayers, senior economist at Nationwide, wrote. “The further cooling of inflation could give the Fed leeway to be more aggressive with rate declines at coming meetings, especially if the labour market shows a steep deterioration.” After the release of the report, which also showed consumer spending rising solidly, traders kept bets that the Fed will stick to a quarter-percentage-point reduction at first, but deliver a bigger half-percentage-point cut at a later meeting.

Financial markets continue to price in the Fed cutting rates by a full percentage point by the end of this year. Most analysts are predicting a bit less, given how strong the economy has been, but say that labour market readings will drive how aggressive the Fed ultimately is.

The US central bank has gone “from being an inflation-first Fed to a labour-first Fed,” is how economists at Evercore ISI summed up the situation on Friday.

The unemployment rate has risen nearly a full percentage point, to 4.3%, since the Fed stopped raising rates a little more than a year ago. That is still low by historical standards but enough for Powell to declare that the Fed would not welcome any further weakening.

The focus of investors as well as the Fed now turns to a run of key data before the September meeting, including the release of the US government’s employment report for August on Friday and the consumer price index report for August in the following week.

Meanwhile, US stocks rose on Friday after a key US government report on inflation bolstered expectations on Wall Street that the Federal Reserve is poised to cut interest rates next month for the first time in more than four years.

The S&P 500 rose 0.5% in morning trading, with nearly 80% of the stocks in the index trading higher. The Dow Jones Industrial Average added 53 points, or 0.1%, and is on pace to set an all-time high for the fourth time this week. The Nasdaq composite rose 0.8% as of 10:47 a.m. Eastern.

The report confirms price increases are cooling, keeping the central bank on track to cut rates at its upcoming meeting next month. The market is betting that the Fed will cut its benchmark rate by a full 1% by the end of the year.

Bond yields were mixed in the Treasury market. The yield on the 10-year Treasury was holding steady at 3.86%.

Chipmakers rose broadly, led by Marvell Technology, which was up 6.5% after its latest quarterly results hit Wall Street’s sales and profit targets. Broadcom rose 3% and Nvidia added 1.7%.

Dell also beat analysts’ second-quarter forecasts, boosted by record server and networking revenue as companies continue to beef up their artificial intelligence infrastructure. Its shares rose 1.8%.

Mall-based cosmetics retailer Ulta Beauty fell 2.6% after its sales and profit fell short of expectations. Ulta also trimmed its guidance below analysts’ forecasts. Warren Buffet’s Berkshire Hathaway revealed it holds a stake in the company earlier this month, Mostly solid US earnings and economic growth updates are capping off a month of encouraging reports for the broader economy. Data from various reports in August have shown that retail sales, employment and consumer confidence remain strong.

Friday’s Commerce Department report also showed that Americans stepped up their spending by a vigorous 0.5% from June to July, up from 0.3% the previous month, and incomes rose 0.3%, faster in July than in the previous month.

The trends have encouraged Wall Street. The benchmark S&P 500 is on pace to close out the final trading day of August with a 1.8% gain for the month. The index is up nearly 18% this year and is within 1% of the all-time high it set in July.

Markets in Europe rose following a report showing inflation fell sharply in the European Union this month. The report sets up the European Central Bank to cut interest rates next month.

France’s CAC 40 added 0.2%, Germany’s DAX ticked up 0.1%, and Britain’s FTSE 100 gained 0.2%.

Markets in Asia rose. Japan’s benchmark Nikkei 225 added 0.7% to finish at 38,647.75 after data on the world’s fourth largest economy came in mostly positive.

Agencies