The Federal Reserve is focusing on future inflation trends rather than past ones, suggesting that interest rate cuts are not imminent. Various alternative measures of US inflation revealed escalations in June, complicating the Fed’s decision-making on potential rate reductions.
The Dallas Fed’s trimmed mean PCE, which removes extreme price changes to capture core inflation, rose at an annualised rate of 3.4% in June and reached a year-over-year increase of 2.7%. This is a slight uptick from earlier months, where it consistently stood at 2.6%.
Cleveland Fed’s Median PCE
The Cleveland Fed’s median PCE, designed to remove volatility, experienced a sharp rise to a 3.6% annualised rate in June, compared to 2.5% in May. Its year-over-year increase reached 3.15%, a minor rise from 3% in the previous month.
The market-based core PCE index, excluding imputed prices, climbed 0.29% in June, marking a 2.6% rise over the year—the highest since March 2024, persistently growing from 2.3% in April. These firmer inflation measures indicate more entrenched price pressures than headline figures suggest, likely prompting detailed analysis at future Federal Reserve meetings.
The Federal Reserve is signaling that it will not be cutting interest rates any time soon. The alternative inflation numbers from June showed that underlying price pressures were actually getting stronger. This complicates the picture and suggests the battle against inflation is not yet won.
Official June CPI Report
The official June CPI report we received mid-month confirmed this sticky trend, coming in at 3.3% year-over-year, stalling the disinflation we saw earlier in the spring. The Fed then held rates steady at their July meeting, pointing to this exact persistence. This is why we are seeing market expectations for a September rate cut now drop below 30%.
For us, this means positioning for interest rates to stay higher for much longer. We should consider that the market may be too optimistic, creating an opportunity to short September SOFR futures. Any rally in Treasury bond prices should be viewed with skepticism.
This environment is a headwind for stocks, especially the tech and growth names that are sensitive to borrowing costs. We expect market uncertainty to rise, which could push the VIX up from its current level around 14. Hedging strategies, like buying puts on the Nasdaq 100 index, should be considered.
A hawkish Fed keeps the U.S. dollar strong against other currencies. With central banks in Europe and elsewhere appearing more ready to ease policy, the dollar is the favored trade. We see value in long positions on the U.S. dollar against the euro.
This situation feels very similar to what we experienced back in late 2023. The final stretch of getting inflation down to the 2% target proved to be the most challenging part. We learned then not to fight a Federal Reserve focused on finishing its job.
