US inflation data could lead to fed interest rate cuts by September

Economist Veronica Clark suggests US inflation and labour market trends may prompt rate cuts soon

US inflation data could lead to fed interest rate cuts by September

Incoming US inflation data can prompt the US central bank to cut interest rates by September, with a weakening labour market adding urgency to policy decisions, as reported by BNN Bloomberg.

Veronica Clark, economist at Citi, states that US Federal Reserve officials are “seeing that the risks to their mandate are really in much better balance now.”

Her comments follow Fed Chair Jerome Powell’s congressional testimony on Tuesday, where he noted “considerable progress” in addressing the worst inflation spike in four decades.

Clark mentioned that “on inflation alone, (the Fed) could probably have the confidence that they could be cutting by September. But as that unemployment rate is rising, they probably want to get there as soon as possible.”

She noted the difference between a loosening and weakening labour market, saying, “We’re right at the border now of what both central banks (Canada’s Bank of Canada and the US Federal Reserve) would maybe consider not just a loosening of the labour market but an outright weakening of the labour market and maybe moving beyond natural rates of unemployment.”

According to Clark, “as the labour market is weakening even more, moving beyond that pandemic balance to excess supply, that should mean downward pressure on wages, wages slowing even more. That’s what gets that underlying inflation, services inflation, something easier to target.”

On Thursday, the US government will issue the latest consumer price index (CPI) reading, expected to show a yearly increase of 3.1 percent in June, down from 3.3 percent in May.

Clark emphasises the importance of the “month-on-month change of core CPI,” stating, “That’s what’s really going to give us a read on core PCE inflation (personal consumption expenditures), which the Fed targets, expecting that to rise by 0.2 percent month on month.”

She added that this increase would be “typical” in a pre-pandemic world and that Fed officials will likely be encouraged by it, even if some details, such as shelter inflation, might show slowing.

Clark believes this will boost the Fed’s confidence that inflation is easing. She also pointed out that three months of data could indicate larger economic trends, noting, “We had a much softer reading for May.

This would be the third month in a row of more favourable data.” Clark concluded, “We reasonably could think that upcoming months would also be slowing too.”