Consumers are cautious as Fed's 2% inflation target in sight
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The Federal Reserve cut interest rates by half a percent last week, playing catch-up to adjust policy for a world in which inflation has receded and the economy may be slowing. New data out Friday morning should make them glad they did.
Why it matters: The latest data on inflation, consumer spending and incomes affirm the outlook that undergirded last week's rate cut, that prices are converging toward the Fed's 2% target and consumers are becoming more cautious.
- It points to concerns about a slowdown in economic activity moving to the forefront, while inflation worries recede. And that supports the case for further rate cuts at the remaining two Fed policy meetings this year.
Driving the news: Over the 12 months ended in August, the Personal Consumption Expenditures Price Index targeted by the Fed has risen a mere 2.2%, the lowest since February 2021. Excluding food and energy, it has run somewhat hotter, at 2.7%.
- Meanwhile, consumer spending rose 0.2%, the softest in seven months. Adjusted for inflation, consumer spending was up only 0.1%.
- Personal income was also the coolest in more than a year, rising a mere 0.2% (0.1% adjusted for inflation).
Of note: Core PCE inflation over the last four months has run at an annualized 1.8%, below the Fed's target and the lowest since the period encompassing the onset of the pandemic in 2020.
- And that's at a time when housing inflation remains elevated — a force economists expect to fade in the months ahead.
Between the lines: Put it all together, and that is a flashing green light for the Fed to shift its focus and be on high alert for any further deterioration in spending, incomes and the job market.
- "Inflation is no longer the story in the PCE data for the Fed," wrote Jamie Cox, managing partner for Harris Financial Group, in a note. "It's now all about spending and keeping the economy strong.
- "If you were second guessing the Fed" cutting rates a super-sized half-point last week, he added, "you aren't now."
What's next: The first major read on how the economy held up in September is due out next Friday, in the form of the jobs report.
- This Friday's benign August inflation and spending numbers essentially give Fed officials more latitude to set their policies based primarily on whether jobs data show a steady labor market or a faltering one.
