On June 28 (Friday), the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce released the “Personal Income and Outlays” report for May. The report indicated that in May, U.S. prices remained stable while consumer spending saw moderate growth. Some economists believe that this trend may bring the Federal Reserve closer to beginning interest rate cuts later this year.
According to the report, the Personal Consumption Expenditures (PCE) price index remained unchanged in May, compared to a 0.3% increase in April that was unrevised. Over the 12 months ending in May, the PCE price index increased by 2.6%, slightly lower than the 2.7% growth in April.
Art Hogan, Chief Market Strategist at B Riley Wealth in New York, told the media, “When you compare the results we have today with expectations, it aligns well with what was anticipated. Therefore, the Fed is likely to have enough confidence to cut rates for the first time before the September 18 meeting.”
Hogan added, “It is noteworthy that the Fed has already projected a year-end core PCE growth rate of 2.6% by 2024, and it appears we have already achieved this goal.”
Peter Cardillo, Chief Market Economist at Spartan Capital Securities in New York, stated, “Personal income was slightly higher than expected, but spending was significantly lower, which is crucial for the Fed, indicating a lower inflation rate.”
Cardillo continued, “The data on (price index) is good and in line with expectations. This is good news. It suggests that inflation has peaked and is moving in the right direction. The question remains whether the Fed will start changing its attitude towards interest rate cuts.”
“If the inflation rate declines for another month, despite many members of the Fed taking a hawkish stance, a rate cut in September is still possible,” he said. “I don’t think inflation will drop to 2% this year. This does not necessarily mean that the Fed cannot cut rates or loosen monetary policy.”
Since 2022, the U.S. central bank has raised rates by 525 basis points to cool domestic demand, as inflation, which surged in the first quarter of this year, is now tapering off. However, the current inflation rate still exceeds the Fed’s 2% target.
Excluding the more volatile food and energy components, the PCE price index rose by 0.1% in May, following a 0.3% increase in April.
The core inflation rate in May rose by 2.6% annually, marking the smallest increase since March 2021, compared to a 2.8% growth in April. The Fed tracks PCE prices to measure monetary policy. Achieving a 0.2% monthly inflation reading for a period of time is a necessary condition for inflation to return to its target.
Since July of last year, the Fed has maintained the federal funds rate within the current range of 5.25%-5.50%. Despite policymakers adopting a more hawkish outlook recently, financial markets expect the Fed to start a loosening cycle in September.
The report also indicated that consumer spending, which accounts for over two-thirds of U.S. economic activity, only grew by 0.2% in May following a 0.1% increase in April. Soft inflation, rising borrowing costs, slowing wage growth, and reduced savings have all hindered consumer spending.
Consumer spending significantly slowed in the first quarter of this year, leading to an annualized economic growth rate of only 1.4%, a significant decline from the 3.4% economic growth rate in the fourth quarter of last year.