The Fed’s key indicator rose 2.5%

A key Federal Reserve gauge showed inflation eased slightly from a year ago in June, helping pave the way for a widely expected interest rate cut in September.

The personal consumption expenditures price index rose 0.1% on the month and 2.5% from a year earlier, in line with Dow Jones estimates, the Commerce Department reported Friday. The year-over-year increase in May was 2.6%, while the monthly reading was unchanged.

Federal Reserve officials use the PCE gauge as their primary measure of inflation, which continues to run above the central bank’s long-term 2% target.

Core inflation, which excludes food and energy, rose 0.2% on the month and 2.6% on the year, both also in line with expectations. Policymakers are focusing even more on core inflation as a better indicator of long-term trends, as gasoline and food costs tend to fluctuate more than other items.

Stock market futures indicated a positive open on Wall Street following the release, while Treasury yields fell. Futures markets are pricing in a more aggressive path for interest rate cuts from the Federal Reserve.

“The report boils down to two words: ‘good enough,'” said Robert Frick, corporate economist at Navy Federal Credit Union. “Spending is good enough to sustain expansion, and income is good enough to sustain spending, and the level of PCE inflation is good enough that the decision to cut rates is an easy one for the Fed.”

Goods prices fell 0.2% on the month, while services rose 0.2%. Housing-related prices rose 0.3% in June, a slight slowdown from the 0.4% increase in each of the previous three months and the smallest monthly increase since at least January 2023.

The report also said personal income rose just 0.2%, below the 0.4% estimate. Spending rose 0.3%, in line with expectations.

As spending remained relatively strong, the savings rate declined to 3.4%, reaching its lowest level since November 2022.

The report comes at a time when markets are paying close attention to the direction of the Federal Reserve’s monetary policy.

There is little expectation that the rate-setting Federal Open Market Committee (FOMC) will take any action at its policy meeting next Tuesday and Wednesday. However, market pricing is strongly pointing to a rate cut at the September meeting, which would be the first reduction since the early days of the Covid pandemic.

“Overall, it’s been a good week for the Fed. The economy appears to be on solid ground and PCE inflation was basically stable,” said Chris Larkin, executive director of trading and investments at E-Trade Morgan Stanley. “But a rate cut next week remains a long shot. And while there’s plenty of time for the economic picture to change before the September FOMC meeting, the numbers have been trending in the Fed’s favor.”

In mid-2022, as inflation hit its highest level in more than 40 years, the Fed embarked on a series of aggressive rate hikes that pushed its benchmark interest rate to its highest level in about 23 years. However, the Fed has been on pause for the past year as it evaluates fluctuating data that earlier this year showed a resurgence in inflation but has lately shown a gradual cooling that has many policymakers discussing the likelihood of at least one cut this year.

Futures markets have priced in a roughly 90% chance of a taper in September, followed by cuts at the FOMC meetings in November and December, according to the CME Group’s FedWatch gauge.

However, Federal Reserve officials have been cautious in their comments, emphasizing that there is no set policy path and that data guides the way.