Wall Street just got new inflation data, and all is clear for another Federal Reserve rate cut next month. The rate cut outlook after that is a different story. The core reading on the personal consumption expenditures price index, the Fed’s preferred inflation metric, which excludes food and energy costs, showed prices increased at a 2.9% annualized pace in August, matching the Wall Street consensus as compiled by Dow Jones. The overall PCE price index rose by 2.7%, also in line with estimates. Expectations for another quarter-point rate cut in October solidified further after the release. The CME Group’s FedWatch tool shows traders pricing in an almost 88% chance of a rate reduction next month, up slightly from about 86% a day ago. That said, the outlook for future rate cuts is murkier, as personal income and spending were ahead of estimates last month. If the consumer remains strong, it may dissuade the Fed from easing policy further. “Consumers literally hit it out of the park with very strong gains in spending not just for August, but June and July as well,” Chris Rupkey, chief economist at FWDBonds, wrote to clients. “Consumer spending is nearing a red hot reading of 3.0% in the third quarter which makes another Fed rate cut this year questionable.” “It isn’t often that the central bank anywhere in the world would cut interest rates to fuel the economy with inflation this high, the stock market setting records and economic growth at this strong of a pace,” Rupkey added. To be sure, others on the Street still expect multiple rate cuts before year-end: “Market and Fed convinced that the likelihood of inflation getting up and running away to the upside in any meaningful way is small,” said Scott Wren, senior equity strategist at Wells Fargo Investment Institute. “Equity buy on dip, even very small dips, still well intact.” “Despite another month of elevated inflation, today’s PCE report was in-line across the board. That gives investors some relief that the current status quo will remain intact and that the Fed will remain on track to cut rates two more times this year,” Bret Kenwell, U.S. investment analyst at eToro, said in an email. “This will make the job of the Federal Reserve a bit easier, versus the data we saw yesterday, with a stronger 2Q GDP report at 3.8%, and a cooler weekly jobless report at 213K. This inline PCE today can keep the focus of the Fed on their full employment mandate which will give them room to continue normalization of the Fed Funds rate,” wrote Art Hogan, chief market strategist at B. Riley Wealth.
