By Ann Saphir
Recent data shows that inflation is continuing to ease, giving Federal Reserve policymakers the green light to consider a first interest rate reduction next month. The personal consumption expenditures (PCE) price index rose 2.5% in July from a year earlier, matching the gain in June. Over the past three months, the annualized reading on the Fed's preferred gauge of inflation is well below its 2% goal.
Fed Chair Jerome Powell has indicated that it is time to cut rates, following a period of battling high inflation. The Fed has kept its policy rate in the 5.25%-5.50% range since last July, but recent price trends suggest that a rate cut at the Sept. 17-18 policy meeting is likely.
Analysts predict that the Fed may become more aggressive with rate declines in future meetings, especially if the labor market shows signs of weakening. Financial markets are currently pricing in a quarter-percentage-point reduction at first, with the possibility of a larger half-percentage-point cut later on.
While most analysts expect the Fed to cut rates by less than a full percentage point by the end of the year, the focus remains on labor market readings to determine the Fed's ultimate approach. The central bank has shifted from prioritizing inflation to focusing on the labor market, reflecting a change in economic conditions.
Unemployment has risen to 4.3% since the Fed halted rate hikes over a year ago, prompting Powell to emphasize the importance of maintaining labor market strength. Investors and the Fed are now awaiting key data releases, including the U.S. government's employment report for August and the consumer price index report for August, to inform their decisions leading up to the September meeting.
Analysis: The easing inflation and potential rate cut by the Fed could impact various aspects of the economy, including borrowing costs, consumer spending, and overall market sentiment. Investors should monitor upcoming data releases and Fed statements to assess the implications for their investments and financial strategies.