Inflation is low enough for rate cuts

The Federal Reserve is expected to hold interest rates steady at a two-day policy meeting this week but open the door to interest rate cuts as soon as September by acknowledging inflation has edged nearer to the U.S. central bank's 2% target.

Policymakers in advance of the July 30-31 meeting were reluctant to commit to the timing of a first rate cut, but audibly cheered  showing price pressures were easing broadly, with headline inflation moving closer to the Fed's target and evidence from job, housing and other markets suggesting that trend would continue.

Data on Friday showed the Fed's preferred  price index, which was accelerating by as much as 7.1% on a year-over-year basis in 2022, rose by 2.5% in June after a 2.6% gain in May. Since March, in fact, the annualized month-to-month changes in the PCE price index show it rising at just 1.5% - half a percentage point below the Fed's target. A companion measure stripping out volatile food and energy prices is trending at 2.3% over that same window - within sight of the 2% goal.

Combined with a broader sense that price pressures are easing, that data may be enough for Fed officials to change their description of inflation as "elevated" in next week's policy statement, and note rising confidence that the pace of price increases will return to 2%. Policymakers have said they should start cutting interest rates before inflation fully returns to their target, and if upcoming data stays in line with recent months they may be running out of time.