New PCE reading not ideal for Fed but won't upend rate cut expectations
10/31/2024 22:43
The Fed may not have received the inflation data it wanted Thursday, but some economists said the central bank is still on track for a 25 basis point rate cut at its policy meeting next week.
The Federal Reserve may not have received the inflation data it wanted Thursday, but some economists said a new reading from the Fed's preferred pricing gauge probably keeps the central bank on track for a 25 basis point rate cut at its policy meeting next week.
Quincy Krosby, chief global strategist for LPL Financial, said she still expects a small rate reduction to be announced Nov. 7, while emphasizing that the mixed inflation picture offered Thursday suggests "that the Fed is still on a bumpy course in this last mile to quell inflation and declare victory."
Other economists who also expect a small cut in November acknowledged there could be a debate among policymakers about whether to pause in November. It will be up to Fed Chair Jerome Powell to maintain a rate-cutting consensus, said one Fed watcher.
"We look for Fed Chair Powell to once again be the voice of reason corralling the FOMC to prudently ease monetary policy next week," said EY Chief Economist Gregory Daco.
The latest reading from the Personal Consumption Expenditures (PCE) index showed inflation rose 2.1% during the month of September, compared with 2.3% in August — within shouting distance of the Fed’s 2% goal.
But the Fed favors looking at inflation on a "core" basis, which excludes volatile food and energy prices. On that metric, inflation clocked in at 2.7%, holding the same level as August. That was slightly higher than expectations of a slight cooling to 2.6%.
Month over month, core prices were a little hotter than the previous month, up 0.3% vs 0.2%, though matching expectations.
The reading on PCE comes after a separate reading on inflation, known as the Consumer Price Index, was warmer than expected during the month of September.
The new data could offer more fodder for an argument being made by hawkish members of the Fed's Federal Open Market Committee to pursue any future cuts gradually and cautiously. Core PCE, after all, has now held at 2.7% for three months in a row as opposed to dropping.
Next week “the Fed will need to acknowledge that with still resilient consumer spending, higher wages from a series of successful strikes, and a solid labor market, they will need to adopt the 'gradual' approach towards lowering rates until there's a comfort level within the FOMC that inflation isn't poised to continue edging higher," Krosby said.
A chorus of officials stressed in the weeks following that September cut a need to cut rates "gradually" going forward, including Fed governor Chris Waller and Dallas Fed president Lorie Logan.
Paul Ashworth, chief North America economist for Capital Economics, said Fed officials will be a little perturbed to see that core services excluding housing prices increased by 0.30% month over month, the biggest gain in the past six months.
But doves on the FOMC will also be able to point to evidence of a gradual cooling over a longer period of time.
The median estimate provided by all policymakers in September was for two more 25 basis points cuts in November and December following an initial 50 basis point cut last month.
Investors are still pricing in a 25 basis point rate cut at next week's policy meeting. Those odds remained well above 90% following Thursday's PCE release.
The inflation report comes ahead of a second crucial report for the Fed: a reading on the labor market due out Friday.
That report may not offer officials a clear assessment because it could be buffeted by two major hurricanes that temporarily caused people in the regions affected by the natural disasters to be out of work, as well as an ongoing labor strike at jet maker Boeing (BA).
Economists expect only 105,000 jobs will be added for the month of October on account of the two hurricanes and Boeing strike. That would mark a drop from the stronger-than-expected 254,000 payrolls added in September. The unemployment rate is expected to hold steady at 4.1%.
"The Fed will likely put less credence in October’s economic data given the clear reasons to expect temporary distortions," said Bill Adams, chief economist for Comerica Bank.
"As such they will likely cut the federal funds rate a quarter percent at the post-election decision next week and look to December’s data to start getting a clearer picture of how the economy is performing after the hurricanes."
EY's Daco said he expects the Fed "to ease policy by 25bps at every meeting through June next year amid resilient but moderating growth and cooling labor market trends."
But Matt Luzzetti, chief US economist for Deutsche Bank, said if core inflation accelerates again in the first quarter of next year, in line with evidence of residual seasonality, "it would imply meaningfully less scope for the Fed to cut rates next year."
Investors "should brace themselves for a few head fakes as the path to 2% inflation will be long and difficult," added Jeffrey Roach, chief economist for LPL Financial.
Click here for in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance