Will PCE tonight add weight to rate cuts? The Fed may be determined this time!

At 20:30 Beijing time, the U.S. Department of Commerce will release the Personal Consumption Expenditures Price Index (PCE), which is a broad indicator covering the prices consumers pay for various goods and services as well as their consumption preferences.

While the Federal Reserve uses a range of indicators to measure inflation, the PCE index is its preferred data point and the only forecasting tool used by members when issuing quarterly forecasts. Policymakers pay particular attention to the core PCE index, which excludes food and energy, when making interest rate decisions.

The Federal Reserve prefers to use the PCE index over the Consumer Price Index (CPI) from the Labor Department because the former takes into account changes in consumer behavior, such as substitution purchases, and has a broader scope.

For the July PCE reading, the consensus expectation from Dow Jones is that recent trends are unlikely to change significantly. Overall PCE and core PCE are expected to increase by 0.2% month-on-month, with year-on-year growth rates of 2.5% and 2.7% respectively. It is expected that the year-on-year growth rate of core PCE will show a slight increase, slightly higher than in June, while the measurements for all items will remain unchanged.

If the reading roughly meets expectations, it is unlikely to prompt Federal Reserve officials to change their plans for the highly anticipated rate cut at the policy meeting on September 17-18.

Beth Ann Bovino, Chief Economist at Bank of America, said: "For me, this will be further evidence that the Federal Reserve sees stable and sustainable inflation readings." Any slight increase "is really just something like base effects, it won't change the Fed's view."

Federal Reserve officials have not declared victory over inflation, but recent statements have shown a more optimistic attitude. The Fed's target is a 2% annual inflation rate.

Although the PCE reading has not been below this level since February 2022, Fed Chair Powell stated last week, "I am more confident that inflation will return to target."

However, Powell also expressed some reservations about the slowdown in the labor market, indicating that the Fed is now shifting from fighting inflation to more actively supporting the employment situation.

Powell said: "The upside risks to inflation have diminished, while the downside risks to employment have increased."

This view is seen as policymakers focusing more on preventing a reversal in the labor market and a broader economic slowdown. This means that attention to data like Friday's PCE reading may decrease, while focus may increase 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 job market is becoming weak. I think this is the focus of their monetary policy."

In addition to the inflation reading on Friday, personal income data for July is also expected to increase by 0.2%, with consumer spending data expected to increase by 0.5%