PCE inflation index signals Fed policy... determines the direction of interest rate cuts

The PCE Price Index, one of the most closely watched economic indicators by the market, is about to be announced. The reason this indicator is important is because it influences the Federal Reserve( Fed)'s inflation policy direction. Experts analyze that movements in the PCE Price Index will play a decisive role in future interest rate decisions.

Inflation Trend Stabilization… What the PCE Indicator Tells Us

What will be the market’s expected result for the PCE Price Index? According to expert forecasts compiled by Dow Jones, both the headline and core PCE Price Index are expected to increase by 0.2% compared to the previous month. Year-over-year, headline PCE is projected to rise by 2.5%, and core PCE by 2.7%.

The general market assessment is that excluding volatile items such as food and energy, core prices will show a slight increase year-over-year. Meanwhile, the headline index, which includes all items, is expected to remain at previous levels. If the PCE Price Index follows these expectations, the Fed’s current policy stance is likely to remain largely unchanged.

Beth Bovin, Chief Economist at U.S. banks, told CNBC, “July’s PCE will serve as a basis for the Fed to confirm that inflation is at a sustainable level.” He also added, “A slight increase in prices is due to base effects,” and “this level of increase will not change the Fed’s fundamental stance.”

67% Chance of Rate Cuts… Market Expectations

The financial markets are already predicting the Fed’s next move. According to CME FedWatch data, there is a 67% probability that a 0.25 percentage point rate cut will occur at the September Federal Open Market Committee( FOMC) meeting. The possibility of a larger 0.5 percentage point cut is evaluated at 33%.

Markets are expecting a total of three rate cuts this year, starting in September and continuing through November and December. Notably, the probability of lowering the rate to between 4.25% and 4.5%, which is 1% lower than the current level, at the last meeting of the year, has reached 44.8%, indicating a fairly concrete outlook for rate cuts.

The Fed’s top decision-makers are also giving positive assessments of the current inflation situation. Jerome Powell, Fed Chair, recently expressed confidence at the Jackson Hole Economic Symposium that inflation will return to the 2% target. He noted that while the inflation goal has not yet been fully achieved, significant progress has been made.

Shift in Policy Focus to the Labor Market… Awaiting Data Confirmation

An interesting point is that the Fed’s policy focus is changing. Powell pointed out, “The risk of inflation rising has decreased, but downside risks in the labor market are increasing.” This indicates that the Fed is shifting its policy focus from inflation concerns to employment conditions.

Powell further emphasized, “The likelihood that the labor market will be the source of inflation is low,” but also stated, “The Fed does not want further deterioration in employment.” These remarks highlight how important employment data will be for future policy decisions.

Recently, employment-related figures have become a major focus of market attention. Last week, the number of new unemployment benefit claims in the U.S. was 231,000, below the expected 232,000. This is seen as a sign that the labor market is not deteriorating rapidly.

The preliminary Q2 GDP growth rate was 3%, exceeding the expected 2.8%. This indicates that the economy remains in a stable state and will likely influence the Fed’s policy judgments along with the PCE Price Index.