< BackRate Cut Magnitude Key Indicator: July PCE Inflation Data Preview and Analysts' Expectations!
The U.S. Bureau of Economic Analysis is set to release July’s Personal Consumption Expenditures (PCE) data this Friday. As Federal Reserve Chair Jerome Powell clearly indicated in his speech last week that a rate cut is expected in September, without hinting that it would be just a quarter-point cut, the July PCE data will have a decisive influence on the extent of the rate cut in September. What is PCE? How is it Different from CPI? PCE (Personal Consumption Expenditures Price Index) is released monthly by the U.S. Bureau of Economic Analysis (BEA) and tracks changes in consumer spending across various goods and services. It is an important indicator for assessing inflation and economic health. Core PCE, which excludes volatile food and energy costs, more accurately reflects inflation trends. The main difference between PCE and CPI (Consumer Price Index) is that PCE not only covers consumer spending but also includes indirect consumer expenditures such as employer-provided healthcare. This makes PCE a more comprehensive reflection of changes in overall spending. Additionally, PCE adjusts the weights of reference goods based on consumer habits more frequently than CPI, making it a more precise index. For these reasons, the Federal Reserve places more emphasis on PCE than on CPI. Economists' Expectations According to a Reuters survey of economists, the PCE index is expected to increase by 2.7% year-on-year, slightly higher than last month’s 2.6%. The Core PCE index is projected to rise by 2.6% year-on-year, up from 2.5% in June. Impact of PCE Data on Rate Cut Decisions The market currently expects PCE to rise slightly but continue the trend of slowing inflation. If PCE growth exceeds expectations, it would indicate a resurgence in inflation, increasing the risk that a rate cut could exacerbate inflation, thereby reducing the likelihood of the Fed cutting rates by more than a quarter-point. Conversely, if PCE growth slows, it would indicate easing inflation, reducing the risk of inflation worsening due to a rate cut, thereby increasing the likelihood of the Fed cutting rates by more than a quarter-point. According to CME’s FedWatch tool, the market currently anticipates a 39% chance of a two-quarter-point rate cut in September, significantly higher than the 24% chance a week ago. AllianceBernstein’s senior economist Eric Winograd commented, “Minor fluctuations in inflation are less important than the state of the labor market. The key trend is that inflation is generally declining.” Rate Cut Expectations The U.S. Consumer Price Index (CPI) for July showed a fourth consecutive month of declining inflation, and business activity over the past month also slowed, reducing companies’ ability to raise prices. These factors confirm that inflation is trending downward, making the risk of a significant increase in July’s PCE growth low. Growth is expected to remain at a similar pace to last month. Therefore, if we solely consider the impact of July’s PCE on the rate cut magnitude, the CMoney research team believes that July’s PCE data will have little impact on the rate cut magnitude, and the trend of slowing inflation will continue, making a quarter-point rate cut in September the most likely scenario. What’s the Difference Between a 25 and 50 Basis Point Rate Cut? As discussed in the article [Market Focus] Powell’s Dovish or Hawkish Stance? Rate Cut Magnitude Determines Market Direction!, the Fed usually starts a rate-cutting cycle with a 25-basis-point cut to avoid overstimulating the economy, which could lead to worsening inflation. A 25-basis-point cut is typically a sign of a precautionary cut and the beginning of a soft landing. On the other hand, if the Fed cuts rates by 50 basis points in one go, it could be a warning sign of severe problems in the U.S. economy, requiring the Fed to make a substantial rate cut in response. In other words, a significant rate cut is a lagging indicator of issues within the U.S. economy. Simply put, you can think of the U.S. economy as a patient and the Fed as a doctor, with rate cuts being the medicine prescribed. From the dosage (rate cut magnitude) the doctor prescribes, we can infer the patient’s health condition.
< BackRate Cut Magnitude Key Indicator: July PCE Inflation Data Preview and Analysts' Expectations!
The U.S. Bureau of Economic Analysis is set to release July’s Personal Consumption Expenditures (PCE) data this Friday. As Federal Reserve Chair Jerome Powell clearly indicated in his speech last week that a rate cut is expected in September, without hinting that it would be just a quarter-point cut, the July PCE data will have a decisive influence on the extent of the rate cut in September. What is PCE? How is it Different from CPI? PCE (Personal Consumption Expenditures Price Index) is released monthly by the U.S. Bureau of Economic Analysis (BEA) and tracks changes in consumer spending across various goods and services. It is an important indicator for assessing inflation and economic health. Core PCE, which excludes volatile food and energy costs, more accurately reflects inflation trends. The main difference between PCE and CPI (Consumer Price Index) is that PCE not only covers consumer spending but also includes indirect consumer expenditures such as employer-provided healthcare. This makes PCE a more comprehensive reflection of changes in overall spending. Additionally, PCE adjusts the weights of reference goods based on consumer habits more frequently than CPI, making it a more precise index. For these reasons, the Federal Reserve places more emphasis on PCE than on CPI. Economists' Expectations According to a Reuters survey of economists, the PCE index is expected to increase by 2.7% year-on-year, slightly higher than last month’s 2.6%. The Core PCE index is projected to rise by 2.6% year-on-year, up from 2.5% in June. Impact of PCE Data on Rate Cut Decisions The market currently expects PCE to rise slightly but continue the trend of slowing inflation. If PCE growth exceeds expectations, it would indicate a resurgence in inflation, increasing the risk that a rate cut could exacerbate inflation, thereby reducing the likelihood of the Fed cutting rates by more than a quarter-point. Conversely, if PCE growth slows, it would indicate easing inflation, reducing the risk of inflation worsening due to a rate cut, thereby increasing the likelihood of the Fed cutting rates by more than a quarter-point. According to CME’s FedWatch tool, the market currently anticipates a 39% chance of a two-quarter-point rate cut in September, significantly higher than the 24% chance a week ago. AllianceBernstein’s senior economist Eric Winograd commented, “Minor fluctuations in inflation are less important than the state of the labor market. The key trend is that inflation is generally declining.” Rate Cut Expectations The U.S. Consumer Price Index (CPI) for July showed a fourth consecutive month of declining inflation, and business activity over the past month also slowed, reducing companies’ ability to raise prices. These factors confirm that inflation is trending downward, making the risk of a significant increase in July’s PCE growth low. Growth is expected to remain at a similar pace to last month. Therefore, if we solely consider the impact of July’s PCE on the rate cut magnitude, the CMoney research team believes that July’s PCE data will have little impact on the rate cut magnitude, and the trend of slowing inflation will continue, making a quarter-point rate cut in September the most likely scenario. What’s the Difference Between a 25 and 50 Basis Point Rate Cut? As discussed in the article [Market Focus] Powell’s Dovish or Hawkish Stance? Rate Cut Magnitude Determines Market Direction!, the Fed usually starts a rate-cutting cycle with a 25-basis-point cut to avoid overstimulating the economy, which could lead to worsening inflation. A 25-basis-point cut is typically a sign of a precautionary cut and the beginning of a soft landing. On the other hand, if the Fed cuts rates by 50 basis points in one go, it could be a warning sign of severe problems in the U.S. economy, requiring the Fed to make a substantial rate cut in response. In other words, a significant rate cut is a lagging indicator of issues within the U.S. economy. Simply put, you can think of the U.S. economy as a patient and the Fed as a doctor, with rate cuts being the medicine prescribed. From the dosage (rate cut magnitude) the doctor prescribes, we can infer the patient’s health condition.
< BackRate Cut Magnitude Key Indicator: July PCE Inflation Data Preview and Analysts' Expectations!
The U.S. Bureau of Economic Analysis is set to release July’s Personal Consumption Expenditures (PCE) data this Friday. As Federal Reserve Chair Jerome Powell clearly indicated in his speech last week that a rate cut is expected in September, without hinting that it would be just a quarter-point cut, the July PCE data will have a decisive influence on the extent of the rate cut in September. What is PCE? How is it Different from CPI? PCE (Personal Consumption Expenditures Price Index) is released monthly by the U.S. Bureau of Economic Analysis (BEA) and tracks changes in consumer spending across various goods and services. It is an important indicator for assessing inflation and economic health. Core PCE, which excludes volatile food and energy costs, more accurately reflects inflation trends. The main difference between PCE and CPI (Consumer Price Index) is that PCE not only covers consumer spending but also includes indirect consumer expenditures such as employer-provided healthcare. This makes PCE a more comprehensive reflection of changes in overall spending. Additionally, PCE adjusts the weights of reference goods based on consumer habits more frequently than CPI, making it a more precise index. For these reasons, the Federal Reserve places more emphasis on PCE than on CPI. Economists' Expectations According to a Reuters survey of economists, the PCE index is expected to increase by 2.7% year-on-year, slightly higher than last month’s 2.6%. The Core PCE index is projected to rise by 2.6% year-on-year, up from 2.5% in June. Impact of PCE Data on Rate Cut Decisions The market currently expects PCE to rise slightly but continue the trend of slowing inflation. If PCE growth exceeds expectations, it would indicate a resurgence in inflation, increasing the risk that a rate cut could exacerbate inflation, thereby reducing the likelihood of the Fed cutting rates by more than a quarter-point. Conversely, if PCE growth slows, it would indicate easing inflation, reducing the risk of inflation worsening due to a rate cut, thereby increasing the likelihood of the Fed cutting rates by more than a quarter-point. According to CME’s FedWatch tool, the market currently anticipates a 39% chance of a two-quarter-point rate cut in September, significantly higher than the 24% chance a week ago. AllianceBernstein’s senior economist Eric Winograd commented, “Minor fluctuations in inflation are less important than the state of the labor market. The key trend is that inflation is generally declining.” Rate Cut Expectations The U.S. Consumer Price Index (CPI) for July showed a fourth consecutive month of declining inflation, and business activity over the past month also slowed, reducing companies’ ability to raise prices. These factors confirm that inflation is trending downward, making the risk of a significant increase in July’s PCE growth low. Growth is expected to remain at a similar pace to last month. Therefore, if we solely consider the impact of July’s PCE on the rate cut magnitude, the CMoney research team believes that July’s PCE data will have little impact on the rate cut magnitude, and the trend of slowing inflation will continue, making a quarter-point rate cut in September the most likely scenario. What’s the Difference Between a 25 and 50 Basis Point Rate Cut? As discussed in the article [Market Focus] Powell’s Dovish or Hawkish Stance? Rate Cut Magnitude Determines Market Direction!, the Fed usually starts a rate-cutting cycle with a 25-basis-point cut to avoid overstimulating the economy, which could lead to worsening inflation. A 25-basis-point cut is typically a sign of a precautionary cut and the beginning of a soft landing. On the other hand, if the Fed cuts rates by 50 basis points in one go, it could be a warning sign of severe problems in the U.S. economy, requiring the Fed to make a substantial rate cut in response. In other words, a significant rate cut is a lagging indicator of issues within the U.S. economy. Simply put, you can think of the U.S. economy as a patient and the Fed as a doctor, with rate cuts being the medicine prescribed. From the dosage (rate cut magnitude) the doctor prescribes, we can infer the patient’s health condition.
