June Personal Consumption Expenditures (PCE) came in line with expectations, rising 0.2% month-over-month and 2.6% year-over-year. Bank of America Securities head of US economics Michael Gapen joins Morning Brief to break down the Federal Reserve’s preferred inflation gauge and what the current state of the economy signals for interest rate cuts.
“It is another bit of evidence for the Fed to say, ‘Yes, the upside that we saw in inflation in the first quarter was largely an aberration. It did not break the disinflation trend.’ Inflation appears to be decelerating gradually in the direction that the Fed wants, so now it’s a question of how much evidence does the Fed need?” Gapen says of the print. He believes that the Fed meeting next week will provide investors more clarity on the timing of the first interest rate cut.
Gapen adds, “the Fed has changed their tone in recent months. It’s now a much more balanced reaction function. It’s not just about inflation. The Fed is saying the labor market is back in balance. So further increases in the unemployment rate would tell the Fed that slack is appearing in markets, and reinforce the view that inflation should come down.” He believes that unemployment is rising because growth in the labor force caused by immigration is outpacing the demand. He continues, “if the labor market is normalizing, employment growth is moderating, and strong inflows into the workforce mean the unemployment rate backs up, that can reinforce Fed cuts. I would argue it only reinforces gradual cuts, not kind of the deep and rapid cuts you might get in a recession.”
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