Upcoming U.S. inflation data could spur Fed rate cut by September: economist

Veronica Clark, economist at Citi, joins BNN Bloomberg to discuss rate cut expectations for the BoC and the U.S. Fed.

One economist says that incoming U.S. inflation data can prompt the U.S. central bank to cut interest rates by September, with a weakening labour market adding new urgency to policy decision-makers.

Veronica Clark, economist at Citi, said that U.S. Federal Reserve officials are “seeing that the risks to their mandate are really in much better balance now.” Clark’s comments come after Fed Chair Jerome Powell said in congressional testimony on Tuesday that “considerable progress” has been made toward defeating the worst spike of inflation in four decades.

“On inflation alone, (the Fed) could probably have the confidence that they could be cutting by September. But as that unemployment rate is rising they probably want to get there as soon as possible,” Clark told BNN Bloomberg, during an interview on Tuesday.

She also mentioned a distinction between a labour market that is loosening and weakening.

“We’re right at the border now of what both central banks (Canada’s Bank of Canada and the U.S. Federal Reserve) would maybe consider not just a loosening of the labour market but an outright weakening of the labour market and maybe moving beyond natural rates of unemployment,” she said.

“You would expect then, as the labour market is weakening even more, moving beyond that pandemic balance to excess supply, that should mean downward pressure on wages, wages slowing even more. That’s what gets that underlying inflation, services inflation, something easier to target.”

On Thursday, the U.S. government will issue the latest reading of the consumer price index (CPI), which economists expect to show a yearly increase of just 3.1 per cent in June, down from 3.3 per cent in May.

Clark says the most important data points are the “month-on-month change of core CPI.”

“That’s what’s really going to give us a read on core PCE inflation (personal consumption expenditures), which the Fed targets, expecting that to rise by 0.2 per cent month on month,” she said.

Clark added that a 0.2 per cent increase would be “typical” in a pre-pandemic world.

“I think Fed officials will be pretty encouraged by that, even if some of the details of this June inflation data might see some slowing in shelter inflation, things that the Fed has been waiting on for a while.

She said she thinks this will go a long way in giving the Fed “more confidence that inflation is easing.”

Overall, Clark said three months could indicate larger economic trends.

“We had a much softer reading for May. This would be the third month in a row of more favourable data,” she said.

“We reasonably could think that upcoming months would also be slowing too.”

With files from Associated Press