Overview: Over the past week, the economic news contained no major surprises. The latest inflation data was in line with expectations, and the Federal Reserve meeting statement left the door open for looser monetary policy. Investors viewed this as a clear path for federal funds rate cuts later this year, and mortgage rates moved lower.
As expected, there was no change in the federal funds rate on Wednesday, and the Fed meeting statement was similar to the prior one. One modification to the statement, though, is that the risks to the Fed’s employment and inflation goals continue to “move into better balance,” suggesting that officials are becoming more concerned about a weakening labor market due to higher rates. However, the language requiring “greater confidence” that inflation is on a sustainable downward path before easing monetary policy remained unchanged. Most investors anticipate that there will be two 25 basis-point rate cuts this year, and that the first will take place at the next meeting in September.
Fed officials keep a close eye on inflation, and the Personal Consumption Expenditures (PCE) Price Index is their favored indicator. In June, core PCE, which excludes food and energy to reduce short-term volatility, was up 2.6% from a year ago. This was the same annual rate of increase as last month and the lowest level since March 2021. Nevertheless, it remains above the Fed's target of 2%, and further progress has become more challenging.
Although the information is somewhat dated by the time it is released, thus diminishing its impact, the gross domestic product (GDP) report remains important because it is the broadest measure of economic activity. During the second quarter of 2024, the U.S. GDP rose at an annualized rate of 2.8%, well above the consensus forecast of 2% and up from 1.4% during the first quarter. Strength was seen in consumer spending, government spending, and nonresidential investment. Inventory levels, which are highly volatile from quarter to quarter, rebounded sharply from unexpected weakness during the first quarter, also adding significantly to the overall growth rate.
Core PCE (annual % change)
Week Ahead
Aug. 1
Institute for Supply Management (ISM) Manufacturing Index
Aug. 2
Employment Report
Aug. 5
ISM Services Index
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