Fed seen on track for September rate cut after good inflation data

By Ann Saphir

(Reuters) – U.S. Federal Reserve policymakers on Friday got fresh evidence of progress on inflation, fueling expectations they will use their meeting next week to signal they could start cutting borrowing costs in September.

The personal consumption expenditures (PCE) price index edged up just 0.1% last month, the Commerce Department’s Bureau of Economic Analysis reported.

That put the year-over-year increase — which the Fed targets at 2% — at 2.5%, after rising 2.6% in May.

Fed policymakers have said they want to be confident that inflation is headed sustainably back to 2% before they ease policy. The data Friday shows they are edging closer to that goal but are still above it, and they are widely expected to keep the policy rate in the 5.25%-5.5% range next week to retain downward pressure on prices.

But U.S. central bankers, who have kept rates where they are since last July, are increasingly focused on the potential for harm to the labor market if they keep borrowing costs far above inflation for too long.

The unemployment rate, at 4.1%, is still low by historical standards but has risen in recent months, and job growth has slowed.

“From the Fed’s perspective, cumulatively, we think the data show enough progress – on both inflation and labor market conditions – for policymakers to open the door to a rate cut in September at next week’s FOMC meeting,” wrote High Frequency Economics’ chief US economist Rubeela Farooqi.

After the data, traders of futures tied to the Fed policy rate added slightly to bets the Fed will deliver a total of three rate cuts by year end, with contracts pricing in a policy rate of 4.63% in December.

Core PCE prices, which exclude volatile food and energy prices and which the Fed uses as a gauge of where inflation is headed, rose 0.2% last month from May, the report showed, a bit more than the 0.1% economists polled by Reuters had projected.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed in June, the Commerce Department report also showed, rising 0.3% from May after a 0.4% increase the prior month.

Bank of America economists argued on Friday that cooling consumer demand and inflation may not be proceeding fast enough to allow for as much policy easing as financial markets expect.

“We remain comfortable with our forecast that cuts will start in December, but upcoming inflation and employment data could tip the scale to an earlier cut,” they wrote.