Key Takeaways

A critical report expected on Friday is anticipated to show inflation being gradually subdued, potentially paving the way for the Federal Reserve to cut its key interest rate later in the year. Simultaneously, forecasts indicate that consumer income and spending likely decelerated in April, signaling a slowdown in the economy's momentum. Many economic forecasters predict the Federal Reserve will initiate rate cuts in November or December, potentially alleviating some of the upward pressure on rates for various types of loans.

If you are awaiting lower interest rates on mortgages and other loans, this upcoming inflation report could be a positive development—though significant decreases in rates are not expected immediately.

Consumer prices, as measured by the Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE) index, are projected to have risen 0.3% in April from March, resulting in a 2.7% year-over-year increase, according to a survey by Dow Jones Newswires and The Wall Street Journal. These figures mirror the increases seen in March, provided the forecasts are accurate.

This data could alleviate concerns about reaccelerating price increases, which had been heightened by unexpectedly high inflation in the first quarter.

More critically, “core” inflation, which excludes volatile food and energy prices, is expected to have increased by 0.2%, a reduction from the 0.3% rate in March. This is particularly noteworthy as Federal Reserve officials closely monitor core inflation. They consider it a key indicator of broader inflation trends and use it to inform the central bank’s monetary policy, which significantly impacts interest rates on all types of loans.

Waiting for Declining Price Increases

Since last July, Fed officials have maintained their key fed funds rate at its highest level since 2001 to curb inflation. They have been waiting for clear signs that price increases are trending down towards a 2% annual rate before reducing the fed funds rate.

Disappointing inflation reports earlier this year dashed hopes that rate cuts might come this summer. Forecasters are now focused on whether these cuts will begin by the end of the year. For instance, Fed Governor Christopher Waller stated last week that officials would need to see “several more months of good inflation data” before supporting rate cuts.

Federal Reserve officials have been trying to strike a balance between controlling inflation with high interest rates and mitigating the adverse effects those high rates have on the economy—particularly the risk of slowing the economy too much and triggering a recession.

A PCE report that aligns with expectations would keep the Fed on track to start cutting rates at its December meeting, according to a research note from economists at Deutsche Bank.

“Though an earlier cut is possible, it likely requires a string of more favorable inflation prints and some softening in the labor market or growth data,” Brett Ryan, senior U.S. economist at Deutsche Bank, wrote, along with his colleagues.

Timing of Potential Rate Cuts

Broader financial markets are more optimistic than Deutsche Bank about the timing of potential rate cuts. As of Thursday, traders were pricing in a 64.2% chance of a cut by November, according to the CME Group’s FedWatch Tool, which forecasts rate movements based on fed funds futures trading data.

The report will also include data on consumer spending and income, which could influence interest rate decisions and provide insight into the financial health of U.S. households. Forecasters expect personal income to have grown 0.3% in April from March, a slowdown from the 0.5% growth in the previous month, and spending to have increased by 0.4%, half the 0.8% growth rate seen in March.

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Additional Information

- Lawsuits and Allegations: The recent legal actions against the Seattle Police Department include accusations of sex discrimination, sexual harassment, and a hostile work environment, particularly against women and people of color within the department.

- Leadership Changes: Adrian Diaz’s reassignment and the appointment of Sue Rahr as interim chief signify a strategic move by Mayor Harrell to address the internal culture and systemic issues within the department.

- Historical Challenges: The department’s history, including the 2012 federal consent decree following the police shooting of John Williams and subsequent efforts to reform, underscores the ongoing challenges in addressing discrimination and improving internal culture.

- Future Direction: Mayor Harrell’s decision to seek an external candidate for the next police chief reflects a broader strategy to bring fresh perspectives and potentially more effective reforms to the Seattle Police Department.