Aug 29 (Reuters) - U.S. stock index futures pared losses on Friday after a largely in-line inflation report did little to change expectations of an interest rate cut at the Federal Reserve's meeting next month.
A Commerce Department report showed the Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index, rose 2.6% in July as expected on an annual basis - above the 2% target of the central bank.
Excluding volatile items such as food and energy, the index rose 2.9%, in line with expectations but suggesting U.S. tariffs on imports were starting to reflect in the prices of some goods.
The U.S. tariff exemption for package imports valued under $800 also ended on Friday, raising costs for businesses and, in turn, consumers.
Traders are still pricing in an 84.2% chance of the central bank lowering interest rates by 25 basis points in September, according to data compiled by LSEG, based on Chair Jerome Powell's dovish comments at Jackson Hole where he acknowledged labor market weakness.
Yields on short-term Treasury bonds , also slipped after the data.
"The numbers released today... leave the door wide open for the Fed to go ahead and cut in their September 17 meeting," said Art Hogan, chief market strategist at B Riley Wealth.
While underlying price pressures are increasing, the central bank has most likely shifted its focus to shoring up the job market and that will drive the decision-making over the course of the next three meetings, Hogan said.
Next Friday's nonfarm payrolls report is now on the radar for more insight on the labor market.
Governor Christopher Waller, a candidate for the central bank's top job, on Thursday said he wants to start cutting rates next month, in line with President Donald Trump's calls to lower borrowing costs.
At 08:54 a.m. ET, Dow E-minis were down 109 points, or 0.24%, S&P 500 E-minis were down 17 points, or 0.26%, and Nasdaq 100 E-minis were down 106.75 points, or 0.45%.
Futures tracking the rate-sensitive small-caps Russell 2000 index pared declines and were last down 0.1%.
Nasdaq futures fell the most, with personal computer maker Dell (DELL.N), and chipmaker Marvell (MRVL.O), down 14.4% and 6.4% after their quarterly forecasts missed expectations.
Nvidia (NVDA.O), lost nearly 1% in premarket trading, a day after the AI chip leader's dour China market expectations jolted investors accustomed to blockbuster forecasts from the company.
Still, strength in its overall results and bullish comments from CEO Jensen Huang calmed worries of an imminent slowdown in demand for artificial intelligence infrastructure, boosting other AI-related stocks, megacaps and chip companies on Thursday.
Attention this week was also on U.S. President Donald Trump's tussle with the central bank.
Governor Lisa Cook filed a motion that declared Trump's effort to fire her was unlawful and seeks to bar the Fed from taking steps to remove her pending further litigation. A hearing on the motion is due at 10 a.m. ET.
Among others, global economy bellwether Caterpillar (CAT.N), lost 2.4% after raising its annual estimate for tariff-related costs.
Celsius Holdings (CELH.O), rose 6.9% after a report said PepsiCo (PEP.O), was increasing its stake in the energy drink maker through a $585 million deal.
Reporting by Johann M Cherian and Sanchayaita Roy in Bengaluru; Editing by Devika Syamnath
