More Fed cuts could be on the way after encouraging inflation signs

The Federal Reserve’s main inflation measure showed core prices rising largely in line with expectations in August, keeping the Federal Reserve on course for two more interest rate cuts this year.

The Commerce Department’s latest data, released Friday, indicated that the core personal consumption expenditures (PCE) price index—excluding volatile food and energy—rose 0.2% for the month, matching forecasts and July’s pace.

The headline PCE index, which includes all items, posted a 0.3% monthly gain, nudging the annual inflation rate to 2.7%.

While this marked a slight uptick from July’s 2.6%, the numbers remained broadly in line with market expectations. 

Spending and income figures also came in above estimates, with personal income up 0.4% and consumption accelerating 0.6% in August. The personal saving rate edged higher to 4.6%. Goods prices increased 0.1%, services rose 0.3%, and housing costs climbed 0.4%.

Energy and food prices saw sharper gains, up 0.8% and 0.5% respectively.

Despite inflation running above the Fed’s 2% target, the central bank’s policymakers signaled last week that they anticipate two more quarter-point rate reductions before year-end.

The Federal Open Market Committee approved its first cut of 2025, lowering the benchmark rate to a 4%-4.25% target range. Markets responded positively, with stock futures rising and Treasury yields dipping after the report.

Fed Chair Jerome Powell and other officials have maintained that the recent tariffs imposed by President Donald Trump are likely to have only a limited, one-off impact on prices. 

The core PCE index is closely watched by the Fed because it filters out short-term price swings and better reflects underlying inflation trends.

With core inflation steady and consumers staying strong, markets put the chance of an October 29 rate cut at 88%, while the odds for another cut in December are about 64%, according to CME Group’s FedWatch tool.