The Personal Consumption Expenditures (PCE) index, the Federal Reserve's preferred measure of inflation, showed a slowdown in consumer price growth in May. While this is likely to improve market sentiment, it does not appear to be enough to prompt the central bank to lower interest rates.
Experts believe that the slowdown in inflation, as measured by the PCE index, will not force the Federal Reserve to change its course on interest rates.
The June 28 (local time) inflation report is particularly important because the PCE index carries more weight with Federal Reserve officials than the Consumer Price Index (CPI) in setting the federal funds rate. This key rate affects interest rates on mortgages, credit cards, auto loans and other forms of borrowing.
Nigel Green, CEO of deVere Group, a leading independent financial advisory and asset management firm, said, "The latest data points to a gradual decline in inflation, which will encourage markets that have been eagerly looking for signs of a possible Fed pivot."
However, Green emphasized, "This is not enough evidence for the dovish Fed to start cutting rates. Several months of consistently positive data are needed to initiate such a move.
The deVere Group's earlier assertion that the Federal Reserve is unlikely to cut interest rates until 2025 is gaining traction among policymakers.
While this is in line with their core assumption, there is still optimism for at least one rate cut this year. "Such a move would provide relief to borrowers, households and businesses without jeopardizing progress on inflation control," Green added.
Comments by Fed Governor Michelle Bowman, reported by CNN, are in line with the deVere forecast. Bowman expressed the belief that rate cuts are unlikely this year due to the risks associated with premature cuts.
"Reducing our federal funds rate too soon or too rapidly could lead to a resurgence of inflation that would require further rate increases to achieve our 2 percent longer-run inflation objective," Bowman said this week.
Bowman's stance is shared by other prominent Fed officials. San Francisco Fed President Mary Daly recently underscored the need for the Fed to be flexible. Daly mentioned that if inflation does not decline as expected, the federal funds rate may need to remain elevated for an extended period of time.
This emerging consensus among policymakers underscores the Fed's commitment to long-term inflation stability and supports the view that rate cuts may not be in the cards until 2025, despite Friday's encouraging PCE report.
