Evening Brief – 08.28.23

Defining Week for September FOMC Meeting

Market participants will have many important economic releases to sift through this week, including the revision to GDP for the second quarter on Wednesday, core PCE on Thursday, and the ISM and August payrolls reports on Friday – data that will probably cement the Federal Reserve’s monetary policy committee decision at its September 19-20 meeting.

Since the previous FOMC projections were released in June, the economy has fared rather well, and inflation readings have been in a downward trend.

After having grown at a rate of 2% in the first quarter, the Bureau of Economic Analysis (BEA) recently reported that real GDP rose at a rate of 2.4% annually in the second quarter.

Monitoring the Fed’s estimates suggests that real GDP will likely climb at a rate of roughly 2.7% annualized in the third quarter and appears the FOMC projections for year-over-year growth in the fourth quarter will be significantly revised upward.

The unemployment rate was 3.5% in July, and the consensus predicts that it will remain unchanged in August. To meet the FOMC’s fourth-quarter projections, the economy would have to shed a large number of jobs during the rest of the year. The FOMC’s fourth-quarter unemployment rate prediction will almost certainly be revised downward.

PCE inflation was 3% year-on-year in June, down from 3.8% annualized in May and below the recent peak of 7% in June 2022. However, July 2022 PCE inflation was slightly negative for the month a year ago, indicating that year-over-year PCE inflation will likely increase in July.

Last year, PCE inflation was strong from August to October, expanding at a 4.2% annual pace, and year-over-year PCE inflation will most likely be revised down at the September meeting.

PCE core inflation climbed 4.1% year-on-year in June, down from 4.6% in May and below the recent peak of 5.4% in February 2022. But July 2022 core PCE inflation was low a year ago, therefore annual PCE inflation will most likely rise in July.

Core PCE inflation increased sharply in September and October last year – at a 6.3% annual rate – and annual measures of core PCE will likely decline in September and October.

The FOMC is still concerned about core inflation. However, this includes shelter, which was up 8% year on year in June (despite slightly negative asking rentals). Core PCE inflation will most likely be trimmed down modestly in the upcoming FOMC estimates.