Fed’s September rate cut looks likely as inflation cools
Cooling inflation and signs of weakening in the labour market have widened the path for interest rate cuts by the Federal Reserve. Market expectations have now shifted, with investors anticipating the first rate cut as early as September, rather than December. (Source: Reuters)
U.S. producer prices rose 2.6% in May from a year earlier, slightly up from April’s 2.5%, according to the Labour Department. Combined with softer-than-expected consumer inflation data, economists estimate that the core Personal Consumption Expenditures (PCE) Index likely stayed near the Fed’s 2% inflation goal last month.
Pantheon Macroeconomics estimates core PCE increased just 0.12% from April, based on the latest PPI and CPI reports. Several Wall Street firms released similar projections.
Economists still believe the Trump administration’s tariffs could push prices higher later this year, potentially reigniting inflation. However, for now, the trend remains favourable, giving the Fed confidence to signal a shift toward easing policy as early as this summer.
The Federal Reserve is expected to hold its benchmark interest rate in the 4.25% to 4.50% range at the upcoming June 17–18 policy meeting. But following Thursday’s inflation data, futures markets now reflect expectations of a quarter-point cut in September, with another possible reduction in October.
This marks a notable shift in market expectations, which previously pointed to a second cut only by December.
A separate Labour Department report showed that initial jobless claims held steady at 248,000 for the week ending June 7. However, continuing claims rose sharply to 1.951 million, their highest level since November 2021, suggesting it is becoming harder for the unemployed to find new jobs.
Heather Long, chief economist at Navy Federal Credit Union, noted that Americans, especially recent graduates, are increasingly concerned about job prospects. If layoffs worsen this summer, she warned, it could heighten recession fears and hurt consumer spending.
(Disclaimer: This slideshow has been sourced from Reuters)
