To some Wall Street analysts, the core PCE price index, the inflation indicator most favored by the Fed, is expected to record the smallest month-on-month increase since November. Prior to this, two inflation reports - CPI and PPI inflation data - released earlier this week both better than economists' expectations, suggesting that the pace of inflation decline is clearly accelerating. Based on CPI, PPI data, and the upcoming core PCE inflation cooling pace, the Fed's latest "dot plot" and official inflation expectations data may be too conservative, with the median of the interest rate "dot plot" showing that Fed officials support only one interest rate cut this year, while inflation forecasts show that Fed officials expect the core PCE price index to reach around 2.8% by the end of the year, higher than the forecast of 2.6% in March.

Producer prices, the key category that affects the core PCE, the inflation indicator favored by the Fed, showed a significant decline, according to PPI data released by the US Labor Department on Thursday. PCE data will be released later this month. Given the already released CPI and PPI, which are significantly lower than expected, Wall Street analysts generally expect that the so-called core PCE index, which excludes food and energy indicators, will rise only 0.1% month-on-month in May.

According to the prediction data of Trading Economics' macroeconomic model based on analysts' general expectations, the annual change rate of the US core PCE price index is expected to reach 2.60% at the end of this quarter, while the year-on-year increase in December is expected to decrease to 2.3%, instead of the 2.8% core PCE increase shown in the latest official Fed forecast.

The latest official quarterly projection released by the Fed on Wednesday shows that the median in the "dot plot" of interest rates indicates that Fed officials support only one rate cut this year. The latest Fed rate "dot plot" released overnight, which is the most eye-catching part of the statement document released after the Fed's interest rate decision, clearly released the hawkish signal expected by the market. The median in the dot plot currently shows that most Fed officials expect to cut interest rates only once in 2024, a reduction of 50 basis points compared to the dot plot in March. Moreover, this time up to four Fed officials supported no rate cuts this year, while the same 10 points that supported three rate cuts this year disappeared.

CPI and PPI data unexpectedly fell, boosting Wall Street's optimism.

However, in the view of Wall Street analysts, the Fed's rate "dot plot" and core PCE forecast may be outdated. They generally believe that similar pace of inflation cooling data for the remaining year will push core PCE significantly lower than the Fed's expectations before the year, which will help support the possibility of two rate cuts this year, and probably the first rate cut will start from September.

According to the latest pricing data in the interest rate futures market, after the unexpected cooling of CPI and PPI data, traders increase the probability of a 25 basis-point rate cut in September to 65%, and the likelihood of a rate cut in December has increased significantly to around 80%. That is, traders wager that the Fed will announce two rate cuts this year in September and December.

If the core PCE or CPI maintains a similar downtrend for several months, according to Fed Chairman Powell's statement at the news conference, the number of Fed rate cuts may be higher than the one shown in the dot plot, which is only one cut. "We are happy about the latest low inflation data, and hope to have more similar data soon," Powell emphasized that the challenge of a rate cut is to gain confidence in approaching the 2% inflation rate. "The Fed is still highly concerned about inflation risk. So far this year, we have not had greater confidence in inflation to start a rate cut. When to cut interest rates is still a matter of discussion." In addition, Powell described the Fed's latest quarterly forecasts, including rate and inflation forecasts, as "conservative forecasts."

CPI inflation data released on Wednesday showed that the core CPI excluding energy and food rose by only 0.2% MOM, while the market expected an increase of 0.3%. The core CPI increased by 3.4% YoY, lower than market expectation of a 3.5% YoY increase. Andrew Tyler, head of US market intelligence at JPMorgan's trading division, said that if the core CPI only rises between 0.20% and 0.25%, market expectations for a September rate cut by the Fed may quickly rise.

If inflation continues to cool down, the probability of a rate cut in September is very high.

Although the latest Fed rate "dot plot" shows that officials' median forecast is only one rate cut this year, if the core CPI and core PCE indexes continue to rise at extremely low month-on-month rates or even decline, it may continuously push the probability of two rate cuts this year, and the first rate cut is expected to start in September.

"There is still a possibility of two rate cuts this year, which are expected to start as early as September, but Fed officials need data to comply with and strengthen their confidence in rate cuts," said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co. "Conservatism is understandable. They are inclined to conservatism, and I think the door is still open."

Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a report to clients: "Our comparison of PPI and CPI data shows that the core PCE deflator in May increased by only 0.11%, well below the average month-on-month increase of 0.32% for the first four months of the year." "Our forecast shows that inflation will experience a significant downward surprise."

Other Wall Street analysts also said that they expect core PCE index to show similar moderate growth, stimulating expectations for two interest rate cuts this year. Paul Ashworth, chief North American economist at Capital Economics, expects core PCE to rise by only 0.11% on a month-on-month basis. Citibank economists believe the figure is 0.15%.

The main PPI categories that help calculate the core PCE index had a mediocre performance in May. Among them, airfare prices fell 4.3%, investment portfolio management service prices fell 1.8%, doctor and nursing costs remained stable, and hospital outpatient care costs rose only 0.5%.

Wall Street analysts' interpretation of CPI and PPI data indicates that the Fed's latest quarterly forecasts may be outdated. Among the inflation forecasts, Fed officials forecast that the core PCE index will reach around 2.8% by the end of the year, higher than the 2.6% forecast in March.

"Slowing rent increases, declining wage inflation and the prospects of compressed retailer profit margins suggest that the core PCE index will continue to rise at a slower pace than the Fed's expectations this week, laying important groundwork for the first interest rate cut in September and at least two interest rate cuts this year," said Shepherdson, chief economist at Pantheon Macroeconomics.

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