Friday afternoon’s US PCE figures will come as further welcome relief to the FOMC, with the core deflator rising 2.6% YoY in May, the slowest pace since April 2021, while the monthly deflator rose just 0.1%, itself the slowest pace since late-last year.
As such, Friday’s data will likely help to provide additional confidence to the FOMC that the US economy is continuing along what remains a bumpy disinflationary path.
Nevertheless, it remains the case that ‘one swallow doesn’t make a summer’, hence the May PCE figures are unlikely to open the door to a cut on their own, though do push said door ajar a little more.
Should inflation continue to behave itself, and incoming data fall in line with the FOMC’s forecasts, through the summer, the first 25bp cut remains on the cards as soon as September.
This is particularly true if cracks emerging in the labour market, such as Thursday’s continuing jobless claims print rising to its highest level since November 2021, were to result in a significant rise in unemployment, and/or a negative nonfarm payrolls print, before said meeting.
The pace of easing, however, barring “unexpected” labour market weakness, or an exogenous shock, should remain relatively gradual, with my base case remaining for 50bp of cuts this year in total (in September, and December).
Policymakers are, for now, set to remain relatively cautious in the pace of normalisation, being reluctant to take a premature ‘victory lap’, likely still wishing to err on the side of keeping policy ‘tighter for longer’, to ensure that the battle against inflation is definitively won.
