The key Fed inflation gauge in August came in at 2.2%, below the anticipated level.

The Federal Reserve's target for inflation was neared in August, making it easier for future interest rate cuts, according to the Commerce Department's report on Friday.

The Fed's focus on measuring the cost of goods and services in the U.S. economy through the personal consumption expenditures price index saw a 0.1% increase for the month, resulting in a 12-month inflation rate of 2.2%, down from 2.5% in July.

According to a survey by Dow Jones, economists predicted that all-items PCE would increase by 0.1% in the current month and 2.3% from the previous year.

In August, the core PCE, excluding food and energy, rose by 0.1% and was up 2.7% from the previous year. This 12-month increase was 0.1 percentage point higher than the July increase. Fed officials consider core PCE as a better measure of long-run trends, with respective forecasts of 0.2% and 2.7% for core.

Despite the inflation figures showing improvement, the personal spending and income figures were lower than expected.

While personal income increased by 0.2% on the month, spending also increased by 0.2%, despite initial estimates predicting increases of 0.4% and 0.3% respectively.

Stock market futures were positive following the report while Treasury yields were negative.

The Fed reduced its benchmark overnight borrowing rate by half a percentage point to a target range of 4.75%-5.1% a little over a week ago.

Despite the increase in housing-related costs by 0.5% in August, services prices increased by 0.2%, while goods declined by the same percentage.

The central bank had not eased since March 2020 during the early days of the Covid pandemic, and the recent move was unusually large for a Fed that typically makes quarter-point rate adjustments.

Fed officials have shifted their focus from fighting inflation to supporting a softening labor market, with policymakers indicating a likelihood of another half percentage point in cuts this year and a full point in reductions for 2025. However, markets expect a more aggressive path.