MW Why won't the Fed cut rates in July? Its favorite inflation gauge is telling it not to.

By Jeffry Bartash

The PCE index is likely to show an above-average increase

The inflation gauge the Federal Reserve relies on most to decide whether to raise or lower U.S. interest rates is likely to cement a decision to stand pat, despite intense pressure from the White House to cut borrowing costs.

The Fed largely bases its actions on movements in the personal-consumption expenditures (PCE) index. It's considered a more accurate barometer of inflation than the better-known consumer-price index $(CPI.UK)$.

The Fed particularly prefers the so-called core rate of inflation, which strips out food and energy costs because of their tendency to seesaw. The core rate is considered the best predictor of future inflation.

The core PCE in the June report is forecast to rise 0.2% to 0.3% when it's released on July 29. Such an increase would be a bit too high to persuade most senior Fed officials to cut rates.

The Fed's next regular meeting to discuss interest rates actually concludes two days before the PCE report is published, but the bank's economists will have already pieced together how much the gauge is likely to rise.

How so? The PCE estimate is largely drawn from the CPI and the producer-price index, both of which have already been reported.

Wall Street DJIA SPX COMP has already come up with its own estimates. Bank of America, Barclays and Citi, among others, predict a 0.3% increase in core PCE. A few firms see a slightly smaller increase.

If they are right, the yearly increase in the core PCE would move up a tick to 2.8% and push inflation further away from the Fed's 2% goal.

The overall PCE inflation rate, meanwhile, is also expected to rise around 0.3%. In a normal economy, alternating 0.1% to 0.2% readings are most common.

The yearly rate in the headline PCE, meanwhile, could climb to 2.6% in June, from 2.3% in the prior month and a postpandemic low of 2.1% last fall.

In short, inflation would be heading in the wrong direction, at least partly because of the Trump administration's tariffs.

Hanging over the meeting would be the persistent threats emanating from the White House about firing Fed Chairman Jerome Powell. But the chair only has one of the 12 votes on the bank's rate-setting board.

Most other Fed voters, who are largely insulated from White House pressure, have signaled they would strongly prefer to keep interest rates at current levels for now.

"Some policymakers have called for rate cuts as soon as this month, but we think the bulk of them, including Chair Powell, want to maintain a wait-and-see approach," Nationwide financial-markets economist Oren Klatchin wrote in a note to clients.

"We see them cutting rates later this year once the inflation threat begins to pass and the jobs market weakens more noticeably," he said.

-Jeffry Bartash

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July 16, 2025 12:55 ET (16:55 GMT)

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