October’s inflation, as gauged by personal consumption expenditures, met expectations, possibly providing the Federal Reserve with additional reasons to keep interest rates stable and contemplate rate reductions in 2024, according to data released on Thursday.
The Commerce Department reported that the personal consumption expenditures price index, excluding food and energy prices, increased by 0.2% for the month and registered a year-over-year growth of 3.5%. These figures align with the consensus estimates from Dow Jones and reflect a slight decrease from September’s readings of 0.3% and 3.7%, respectively.
The headline inflation remained unchanged for the month and maintained a 3% rate over the 12-month period, as indicated by the release. Energy prices decreased by 2.6% during the month, contributing to the overall containment of inflation, while food prices recorded a 0.2% increase.
Goods prices experienced a 0.3% decline, while services rose by 0.2%. Notably, international travel, healthcare, and food services and accommodations saw the most significant gains in the services sector, while gasoline prices led the gainers among goods.
Both personal income and spending rose by 0.2% during the month, meeting expectations and suggesting that consumers are keeping pace with inflation. However, both figures marked a slowdown compared to the previous month, with income rising by 0.4% in September and spending increasing by 0.7%. The deceleration in spending growth aligns with the Federal Reserve’s objective to cool the economy, facilitating a reduction in inflation pressures.
Following the release of this data, stock markets rallied, with the Dow Jones Industrial Average reaching its highest point in 2023. Concurrently, bond markets saw a sell-off, leading to an increase in Treasury yields. The 2-year note, which is particularly sensitive to interest rate changes, witnessed an increase of over 6 basis points, reaching 4.71%.
Market futures continue to indicate the likelihood that the Federal Reserve will refrain from raising interest rates at its upcoming meetings, with the possibility of rate cuts emerging by springtime. Traders are pricing in multiple rate cuts for 2024.
While the broader public often follows the Labor Department’s consumer price index as an inflation indicator, the Federal Reserve favors the core personal consumption expenditures reading. Unlike the consumer price index, which primarily examines the cost of goods and services, the core PCE reading focuses on actual consumer spending, taking into account consumer behavior adjustments when prices fluctuate. In October, the core consumer price index registered at 4%, while the headline figure was 3.2%.
In other economic developments on Thursday, initial weekly jobless claims rose to 218,000, marking an increase of 7,000 from the previous period, though slightly below the estimated 220,000. However, continuing claims, which lag by a week, surged to 1.93 million, indicating an 86,000 increase and reaching the highest level since November 27, 2021, as reported by the Labor Department.
Bill Adams, the chief economist at Comerica Bank, commented, “The Fed is on hold for now, but their pivot to rate cuts is getting closer. Inflation is clearly slowing, and the job market is softening faster than expected.”
Market participants had already factored in the likelihood that the Federal Reserve has completed its interest rate hikes for this cycle. Furthermore, with the latest PCE reading and signs of a loosening labor market, this stance could solidify further. Alongside the expectation that rate hikes are over, markets are also pricing in the equivalent of five quarter-percentage-point rate cuts in 2024.
New York Fed President John Williams stated on Thursday that he anticipates a gradual decline in inflation, ultimately reaching the Federal Reserve’s 2% target by 2025. However, he emphasized that policymakers will need to remain vigilant and maintain a “restrictive” rate stance.
He remarked, “My assessment is that we are at, or near, the peak level of the target range of the federal funds rate. I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2 percent longer-run goal on a sustained basis.”
The federal funds rate, which serves as the central bank’s benchmark for short-term lending, is currently targeted in a range between 5.25% and 5.5%, marking its highest level in over 22 years. Following eleven rate hikes implemented since March 2022, the Federal Reserve opted to skip its last two meetings. Furthermore, recent statements from most policymakers have indicated contentment with observing the effects of previous rate increases as they unfold within the economy.
Despite several recent economic indicators suggesting a relatively healthy state of the economy, some Federal Reserve officials have expressed concerns that the data does not align with the feedback they have received from real-world observations.