The Fed's "favorite" inflation indicator is coming tonight, will it "add fuel" to the rate cut expectations?

According to Zhitong Finance, the inflation indicator favored by the Federal Reserve will be released later on Friday, which may affect the interest rate decision in September, although the impact of the inflation report is currently less important than the employment report.

The U.S. Department of Commerce will announce the U.S. July PCE Price Index at 20:30 Beijing time. This is a significant indicator that measures consumers' spending preferences for various goods and services. Economists expect that the core PCE Price Index, the indicator favored by the Federal Reserve to measure potential inflation, will rise by 0.2% for the second consecutive month in July, bringing the three-month core inflation annual rate down to 2.1%, slightly above the Fed's 2% target. It is also expected that the overall PCE Price Index will increase by 0.2% month-on-month and by 2.6% year-on-year.

Although the Federal Reserve uses a range of indicators to measure inflation, the PCE Price Index is its preferred data point and the only forecasting tool used by members when releasing quarterly forecasts. Policymakers pay particular attention to the core PCE Price Index, which excludes food and energy, when making interest rate decisions. The Fed prefers personal consumption expenditures over the CPI index published by the U.S. Department of Labor because the former considers changes in consumer behavior, such as substitution purchases, and has a broader scope.

Economists also predict that U.S. personal spending in July will increase by 0.5% month-on-month, the largest increase in four months, while personal income in July will grow by 0.2%. As consumer spending is a key driver of U.S. economic growth, this data is expected to demonstrate the resilience of the U.S. economy.

For the July data, Dow Jones generally believes that there will be no significant changes in the recent trends. If these data are broadly in line with expectations, it should not prevent Fed officials from implementing the anticipated rate cut at the policy meeting on September 17-18.

Beth Ann Bovino, Chief Analyst at U.S. Bank, said: "In my view, this is just another piece of evidence that the Fed sees inflation data growing at a sustainable pace. Any slight increase is actually just a base effect and will not change the Fed's view."

Data released on Thursday also showed that U.S. inflation is steadily cooling. Revised data released by the U.S. Department of Commerce showed that the annualized seasonally adjusted overall PCE Price Index for the second quarter was revised down to 2.5% from the previous 2.6%; after excluding food and energy prices, the annualized seasonally adjusted core PCE Price Index for the second quarter was revised slightly down to 2.8% from the initial 2.9%, lower than the expected 2.9%. Federal Reserve officials have not yet declared victory over inflation, but recent statements indicate a more optimistic outlook. Despite the Personal Consumption Expenditures (PCE) data not falling below the Fed's target level since February 2022, Fed Chair Powell stated last week, "My confidence has strengthened," suggesting that inflation is returning to target levels. However, Powell also expressed some reservations about the slowdown in the labor market, indicating that the Fed seems to be shifting focus from combating inflation to paying more attention to supporting the employment situation. Powell stated, "The upside risks to inflation have diminished. The downside risks to employment have increased."

This view is seen as a sign that policymakers will pay more attention to signs of preventing a reversal in the job market and an overall economic slowdown. This may mean that the market is no longer as focused on inflation data such as the PCE price index released on Fridays, but more on the August non-farm payroll report to be released on September 6.

Bovino said, "The Fed's focus will be on employment. They seem more concerned about whether the employment side will weaken. I think this is the focus of their monetary policy."

At last week's Jackson Hole central bank symposium, Fed Chair Powell acknowledged the recent progress made in inflation. Powell stated, "The time for policy adjustment has come," and the Fed "is not seeking nor welcoming further cooling of the labor market."

Powell's remarks mark a key turning point for the Fed's two-year battle against inflation, highlighting its shift in focus to labor market risks - another part of the Fed's dual mandate, as employment growth helps sustain consumer spending, which is crucial for ensuring economic expansion.

Economists like Anna Wong said, "Powell's dovish speech at the Jackson Hole symposium was music to the ears of market participants. He pledged that the Fed will do everything it can to support a strong labor market to provide support for the economy. We believe a reality check is necessary."

After Thursday's better-than-expected GDP and initial jobless claims data, futures traders slightly reduced their bets on Fed easing. Currently, the CME "FedWatch Tool" shows traders are generally betting on a 25 basis point rate cut by the Fed in September (67% probability), but still expect around 100 basis points of rate cuts by 2024.