The Federal Reserve is currently navigating a sensitive period, with recent economic data indicating a potential pause in interest rate hikes. July's CPI data came in line with estimates, while projections for the Personal Consumption Expenditures (PCE) report, due today, suggest a modest increase. FactSet consensus forecasts headline PCE to rise 0.07% month-over-month, following a 0.11% decline in June, with the year-over-year rate easing to 3.6% from 3.7%. Core PCE, which excludes food and energy, is anticipated to rise 0.18% month-over-month, with the annual rate holding at 3.3% or slightly easing to 3.2%. These figures follow last week's FOMC minutes, which revealed broader support for a rate hike than the official vote suggested.
Boston Fed President Susan Collins has voiced support for holding rates steady, provided inflation continues to ease, describing recent price data as "mildly encouraging" but emphasizing the need for sustained progress towards the 2% target. She noted that while hiring has cooled, layoffs have not yet climbed, creating an "unusual balance" in the labor market that gives the Fed room to hold steady. This stance is further supported by economists raising core inflation forecasts for the year but scrapping the possibility of a rate cut until well into 2027.
Despite some economists, like Natixis chief US economist Christopher Hodge, taking a slightly more hawkish view due to upward pressure from computer hardware and software prices related to AI investment, the overall sentiment points towards the Fed maintaining its current position. The July CPI print has already put the bar for a Fed hike higher than for a hold, with a 35% chance of a rate hike at the September meeting, which is expected to decline. This data arrives just two days before Fed Chair Kevin Warsh's keynote address at Jackson Hole, where markets will be looking for signals on the Fed's future policy direction.
Market reactions are expected to be conventional: a softer-than-forecast core PCE reading would likely bolster equities, especially growth and technology stocks, while weakening the dollar and boosting gold. Conversely, a hotter-than-expected print would likely push Treasury yields higher, pressure growth stocks, strengthen the dollar, and prompt profit-taking in gold, reinforcing arguments for further tightening.
