Last week, the Bureau of Economic Analysis (BEA) published the Personal Consumption Expenditures (PCE) index for July 2023. The report contains the latest data on inflation and is a preferred benchmark for the Federal Reserve. The Bureau of Economic Analysis compiles and provides data on consumer spending, personal income, and expenditures.
According to the report, it is clear that inflation is a concern for most Americans. The core PCE price index, excluding food and energy, increased from 4.1% to 4.2%. However, despite rising prices, American consumers increased their spending by 0.8% in July, while personal income only increased by 0.2%.On a monthly basis, the core PCE increased by 0.2%.
The weekly unemployment claims also decreased by 4,000 to 228,000, the largest drop in the last six months. It is also evident from the data that the savings rate fell by 3.5%, indicating that the growth in consumer spending is not sustainable.
The U.S. economy has emerged from a recessionary period and entered a period of strong economic growth. The Federal Reserve Bank of Atlanta has estimated that GDP growth in the third quarter will be 5.9%, which is 0.1% higher than the forecast from August 16th.
Such news of a strong economy amid inflationary pressure poses a challenge for the Federal Reserve System. It significantly complicates the Fed's task of reducing inflation to the target level of 2% while ensuring full employment.
Based on this data, the Federal Reserve System will likely maintain its aggressive and restrictive monetary policy. According to the CME's Fedwatch Tool, there is an 89% probability that the Fed will not raise its benchmark interest rate at the September FOMC meeting. Additionally, according to this probability indicator, the likelihood of rate hikes at the November meeting is 57.1%, and in December, it is 56.1%.
Thanks to this information and Friday's news about changes in non-farm employment, the dollar strengthened and rose for two days, returning to a three-month level.