Fed’s Top Inflation Gauge Continued Cooling in October, Signalling Interest Rate Cuts Could Be Near
The Core Personal Consumption Expenditures (PCE) Index, the Federal Reserve's favourite inflation gauge, continued its cooling trend in October, with core PCE reaching its lowest level since May 2021.
The end of interest rate hikes and the beginning of rate cuts could be closer than ever following the release of the latest inflation data today. The Personal Consumption Expenditures (PCE) Index, the U.S. Federal Reserve’s top inflation gauge, increased by less than 0.1% in October and 3% year-over-year, down from 3.4% in September.
Core PCE, which excludes volatile food and energy prices, rose 0.2% month-over-month in October, down from 0.3% in September. Year-over-year, Core PCE increased 3.5%, down from 3.7% in the previous month. The October PCE figures aligned with analyst expectations, with the reading on Core PCE reaching its lowest level since May 2021.
In a research note today, EY senior economist Lydia Boussour commented on the latest inflation data and the likely direction of the Fed, writing:
“For the Fed, fresh signs of softer inflation and consumer demand confirm it is well positioned to remain on hold at the December policy meeting. We reiterate our long-standing view that the Fed’s tightening cycle is likely complete. With the Fed’s favored inflation gauge — core PCE inflation — likely falling below 2.5% in the spring, we expected the first Fed rate cut in June 2024.”
With the latest inflation data signalling that the Fed’s rate hike campaign is almost certainly over and that rate cuts could begin as soon as the end of Q2 2024, markets reacted positively with the Dow Jones Industrial Average (DJI) and S&P 500 (SPX) rising 1.47% and 0.38%, respectively. The NASDAQ Composite (IXIC) failed to close the day in the green, slipping 0.23%.
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