• July's core PCE increase is unlikely to trigger a Fed rate hike in September, according to Capital Economics.
  • With annual core inflation at 3.3% and resilient economic growth, the firm believes higher rates may eventually be necessary.
  • For now, the data strengthens the case for the Fed to hold rates steady.

A Steady Hand for September

Capital Economics suggests that the latest core PCE reading, while still elevated, won't force the Federal Reserve's hand at its September meeting. The firm argues that the data supports a pause in rate hikes for now, aligning with market expectations. However, they caution that this is not the end of the tightening cycle.

"The July core PCE increase is unlikely to trigger a rate hike in September," said a senior economist at Capital Economics. "The Fed will likely hold rates steady in the near term, but the persistent high inflation keeps the risk of a future increase on the table."

Underlying Pressures Persist

With core inflation hovering around 3.3% annually, well above the Fed's 2% target, and economic growth remaining solid, upside risks to inflation persist. This suggests that while a hold is appropriate now, policymakers may need to act later if inflation proves more stubborn.

"The resilience of the economy is remarkable, but it also means that demand remains strong enough to keep upward pressure on prices," the economist added. "If we see further signs that inflation is not cooling, the Fed could be forced to resume hikes."

Market Implications

In the short term, a hold supports current borrowing costs and asset prices. However, the market is likely to price in potential tightening later in the year if inflation continues to run hot. Investors should watch for upcoming inflation data and Fed communications for clues on the rate trajectory.

"The Fed is in a wait-and-see mode, but the door is open for further action," said a market strategist. "The key will be whether inflation continues to soften or reaccelerates."

Looking Ahead

As the September FOMC meeting approaches, all eyes will be on the latest economic indicators and Fed officials' remarks. While the current data supports a hold, the future path of rates remains uncertain. Capital Economics emphasizes that higher rates may eventually be necessary to bring inflation back to target.

"We expect the Fed to hold in September, but the risk of a hike later this year is real," the economist noted. "The economy's resilience means the central bank can afford to be patient, but it cannot afford to let inflation become entrenched."

For now, the takeaway is clear: the Fed is likely to hold rates steady, but the threat of further tightening looms if inflation disappoints.