Interest Rates, Inflation and The Fed

A crucial measure of inflation, used by the US Federal Reserve to guide interest rates, showed a further easing last month due to declining energy and goods prices, as revealed by government data on Thursday.

In October, the annual Personal Consumption Expenditures (PCE) price index increased by 3.0 percent, a decrease of 0.4 percentage points from the previous month, according to the Commerce Department. Stripping out volatile food and energy prices, the core inflation also slowed to an annual rate of 3.5 percent, aligning with economists' expectations.

Personal incomes also saw a slowdown in October, rising by 0.2 percent from September. The data is encouraging for the Fed, which recently maintained its key lending rate at a 22-year high, aiming to bring inflation firmly back to the long-term target of two percent without triggering a damaging recession.

Policymakers at the central bank, aiming for a "soft landing," where inflation is reduced without causing a downturn, have expressed optimism about achieving this delicate balance. A Fed survey released Wednesday indicated a slowing US economy and a cooling job market, signaling a potential soft landing.

On a monthly basis, PCE inflation remained nearly flat in October, while core PCE rose by 0.2 percent from September. Energy prices fell by 2.6 percent, and goods prices declined by 0.3 percent from the previous month. Monthly PCE inflation stayed positive with a 0.2 percent increase in both services and food prices.

The October PCE data reinforces expectations that the Fed will maintain interest rates for the third consecutive meeting in mid-December. Rubeela Farooqi, Chief US Economist at High Frequency Economics, noted that sustained easing in price pressures will likely support a steady policy stance. She anticipates the Fed's next move could be a rate cut, possibly by the middle of next year. New York Fed President John Williams suggested that the Fed's rate-setting committee has reached a restrictive monetary policy stance. He predicted continued economic growth slowing next year, indicating that maintaining a restrictive stance for some time would be appropriate to restore balance and bring inflation back to the two percent goal on a sustained basis. Williams stated that the Fed is likely at or near the peak level of the target range for the federal funds rate, referring to the benchmark lending rate. Futures traders currently assign a 96 percent probability that the Fed will stand firm on December 12-13, according to CME Group data.

Shayne Heffernan