Fed seen on track to resume rate cuts after inflation, job market data

Recent economic data, including cooler-than-expected CPI and PPI figures, alongside a rise in continuing jobless claims to the highest level since November 2021, have increased expectations that the Federal Reserve will resume cutting interest rates as early as September. Economists estimate that the Fed's preferred inflation gauge, core PCE, likely rose in line with the Fed's 2% target in May, leading traders to anticipate a rate cut in September and another in October, contrasting with previous expectations of a second cut in December. While economists still expect tariffs to push up prices later in the year, the near-term trend is seen as favorable for the Fed to signal easing in policy.

Analysis

Recent economic indicators suggest a clearer path for the Federal Reserve to resume interest rate cuts, potentially starting in September. U.S. producer prices advanced 2.6% year-over-year in May, a slight increase from April's 2.5%, but when combined with tamer-than-expected Consumer Price Index data for May, economists estimate that the core Personal Consumption Expenditures (PCE) Price Index – the Fed's preferred inflation measure – likely rose in line with the 2% target last month; Pantheon Macroeconomics specifically projects a 0.12% month-over-month core PCE increase. Concurrently, the labor market is exhibiting signs of cooling: initial weekly jobless claims held steady at 248,000 for the week ended June 7, while continuing claims surged to 1.951 million, their highest level since November 2021, indicating increased difficulty for unemployed individuals in securing new positions. Consequently, futures markets now price in a quarter-percentage-point rate reduction by September and another in October, an accelerated timeline compared to previous expectations of a second cut in December. This outlook emerges even as the Fed has already implemented three rate cuts in 2024 and is widely anticipated to maintain its current policy rate of 4.25%-4.50% at its upcoming June 17-18 meeting, though it may signal an intention for future easing. Despite this dovish shift, potential inflationary pressures from tariffs later in the year remain a cited concern.

Key Decisions for Investors

• Investors should prepare for heightened market volatility around key inflation and employment data releases, as these will heavily influence the Federal Reserve's policy trajectory towards anticipated rate cuts starting as early as September.
• Consider adjusting portfolios to reflect a potentially more dovish monetary policy, which could benefit interest-rate sensitive sectors, while also hedging against the risk of resurgent inflation possibly driven by tariffs later in the year.
• Closely monitor trends in continuing jobless claims and overall labor market health, as further deterioration could signal a slowdown in consumer spending and increase recessionary risks, impacting broader asset allocation strategies.