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The latest inflation data hits the "Goldilocks" sweet spot, keeping price pressures modest enough for the Federal Reserve to proceed with widely anticipated interest rate cuts as an insurance policy against slowing economic growth. Neither too hot nor too cold, the numbers allow the central bank to provide monetary stimulus without fanning fears of accelerating inflation that could force more aggressive policy tightening down the line.
• The Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 2.5% annually in June - matching estimates and staying just above the 2% target.
• Core PCE, which strips out volatile food and energy, also met expectations at 2.6% year-over-year rate.
Key Takeaways:
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Numbers hit the "Goldilocks" sweet spot - not too hot to spur aggressive Fed tightening, not too cold to delay an insurance cut.
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Cements expectations for a 0.25% rate reduction at the September 17-18 FOMC meeting.
○ Would be first Fed rate cut since 2008 financial crisis
○ Futures pricing in at least one more cut by year-end -
"Ideal landscape" for investors to start Q3, according to Charles Schwab's Liz Ann Sonders.
○ Removes major obstacle for further equity gains
○ Boosts sectors like financials, consumer discretionary, technology -
Preserves purchasing power for bond investors, with dramatic inflation still the biggest longer-term risk.
"The latest readings provide the Goldilocks scenario, giving the Fed room to insure against growth risks while avoiding an inflation overshoot requiring aggressive action." - Sonders
Bottom Line: Unless inflation accelerates rapidly, the Fed appears cleared for liftoff on interest rate cuts starting next month. An ideal backdrop for risk assets, as long as price pressures remain contained.
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