1. Beyond September/October, we think the environment will become less supportive for further Fed rate cuts.
2. This is mostly because core PCE inflation will likely turn sharply higher on a year-on-year basis, for two reasons.
3. First, the current year-on-year rate is depressed by outliers to the downside in late 2018/early 2019, which will start to fall out of the year-on-year calculation starting with the August release published in late September.
4. Second, the tariffs are about to show up more clearly in the PCE numbers, starting with the September release published in late October.
5. Although it is true that tariffs are equivalent to indirect tax increases and therefore less relevant for monetary policy than other sources of inflation, it will become harder to make a case for further rate cuts when core PCE has a 2-handle, as we think it will by early next year.