• ‘All relevant categories are slowing: Goods prices continue to slide, and service inflation continues to decelerate. Housing services, meanwhile, rose at the slowest pace since mid-2021, suggesting that critical shelter inflation is also finally decelerating consistently, says Wurm

ISTANBUL

The Federal Reserve is expected to signal that US economic indicators and the outlook of the American economy are on course for an interest rate cut in September after its two-day meeting Wednesday, according to an expert.

"The FOMC (Federal Open Market Committee) will offer a clear signal that things are on track for cuts, but likely stop short of announcing a September cut outright," Martin Wurm, a director at Moody’s Analytics, told Anadolu.

Wurm noted, however, that FOMC members "tend to keep the door open to change their minds should something unexpected happen."

"The FOMC will echo optimistic comments made by Fed Chair Jerome Powell and various board members over the past two weeks. The FOMC is ready to cut before inflation is back to target, and recent data is pointing towards an accelerated timeline," he added.

The Fed's preferred annual inflation indicator, core PCE price index, remained unchanged at 2.6% in June, according to Commerce Department figures released Friday. The core PCE price index increased 0.2% in June, gaining pace from a 0.1% month-on-month increase in May.

The PCE price index, which includes food and energy prices, rose 2.5% annually in June, slowing from a 2.6% annual gain in May. It increased 0.1% in June, after remaining unchanged in May.

"June’s PCE deflator delivered no surprises," said Wurm. "Disinflation remains on track."

In the second quarter, the PCE deflator rose at an annualized pace of 2.6%, down from 3.4% in the first quarter, while annualized core PCE inflation rose 2.9%, down from a gain of 3.7%, he noted.

"All relevant categories are slowing: Goods prices continue to slide, and service inflation continues to decelerate. Housing services, meanwhile, rose at the slowest pace since mid-2021, suggesting that critical shelter inflation is also finally decelerating consistently," he added.

'Fed unlikely to have reason to delay beyond September'

All macroeconomic arrows are pointing toward the first interest rate cut in September, according to Wurm.

"After inflation came in hotter than expected in the first three months of the year, policymakers signaled that they would need an about equal number of offsetting good inflation reports before considering rate cuts," he said.

"Now, with two months of consistently good inflation prints in hand, the Fed is unlikely to have a reason to delay beyond September," he added.

Consumer price index (CPI), which measures changes in the prices of goods and services from a consumer's perspective, rose annually at 3% in June and was lower than estimates of a 3.1% gain. It slowed from an increase of 3.3% that was recorded in May.

CPI showed a decline of 0.1% in June, and was below expectations of a 0.1% increase, while it managed to post a slowdown from May when it showed no change.

2 rate cuts of 25 basis points each expected in 2024

Wurm said: "A reacceleration of inflation at this point is hard to imagine."

"While second-quarter GDP surprised to the upside, labor markets have come into balance over the past year, while downside risks remain in the strained financial sector," he added.

The American economy expanded 2.8% in the second quarter of 2024, according to a first advance reading by the Commerce Department.

While the figure was higher than estimates of 2%, it followed an expansion of 1.4% in the first quarter.

Moody’s Analytics expects two 25-basis points of interest rate cuts this year -- in September and December -- according to Wurm.

"Afterwards, the Fed will slowly normalize (interest) rates by roughly a quarter-point per quarter," he said.

Fitch Ratings also expects two interest rate cuts this year from the Fed.

"The latest US inflation and labor market data support our view that two reductions are likely in 2H24," it said Monday.

The rating agency, however, noted that economic slowdown looms in the world's largest economy, due to heightened political and geopolitical uncertainty.

"Signs of a slowdown in the US are evident in weak credit growth and slowing consumer spending," Fitch said, adding that it expects the trends to continue in the second half of this year with headline real GDP growth decelerating.