U.S. Inflation Data to Test Fed’s Rate Cut as Markets Eye Friday Report
All eyes are on Washington this week as the Federal Reserve braces for new inflation data that could determine whether its recent decision to cut interest rates was well-timed. On Friday, the U.S. personal consumption expenditures (PCE) price index for August — the Fed’s preferred gauge of inflation — will be released. Economists expect headline inflation to hold at about 2.8% annually, but any upside surprise could reignite fears that the Fed acted too soon.
The central bank lowered its benchmark rate by a quarter percentage point last week, holding it at a range of 4.25% to 4.5%. Instead of easing borrowing costs across the board, yields on the 10-year and 30-year U.S. Treasury bonds actually climbed. Analysts say that reaction shows bond traders remain unconvinced the U.S. economy is slowing enough to warrant looser policy, especially with government debt and fiscal spending still at elevated levels.
Equity investors, however, seem to be taking the Fed’s move in stride. On Friday, the S&P 500 and the Dow Jones Industrial Average both closed at fresh record highs, while the Nasdaq Composite surged 2.2% over the week. Those gains capped a winning streak for all three major indexes, even as European markets finished slightly lower.
Beyond inflation, a string of political and international developments is adding to the economic backdrop. Former U.S. President Donald Trump and China’s Xi Jinping discussed a possible deal over TikTok on Friday, with Trump hinting that the Murdoch family could play a role. Meanwhile, Trump also proposed a steep $100,000 annual fee for H-1B visas — a move that could hit the tech sector, which relies heavily on skilled foreign workers.
In Asia, South Korea’s president Lee Jae Myung warned that a $350 billion U.S. investment tied to a bilateral trade agreement could destabilize his country’s economy without a currency swap. And in China, e-commerce giant Alibaba is betting billions on artificial intelligence to recapture its competitive edge. For the Fed, though, the immediate question is whether Friday’s inflation reading will validate its rate cut or prompt a new round of second-guessing from Wall Street.
source: cnbc