Key highlights:
The chances of the Federal Reserve raising interest rates at its next meeting have fallen after an inflation report came in weaker than economists had projected. Markets now see a 37.6% probability of a rate hike at the Fed’s October 28–29 meeting, down from around 68% earlier in the week, according to the CME FedWatch tool.
Target rate probabilities for Oct Fed meeting. Source: CME FedWatch tool.
Inflation data comes in below expectations
The drop followed Wednesday’s release of the Personal Consumption Expenditures (PCE) index, the inflation measure the Fed banks on to make interest rate decisions.
The PCE price index rose by 0.3% in August, putting the annual increase at 3.4%, lower than the 3.7% projected by economists. Core PCE climbed 0.2% for the month, when volatile food and energy prices are removed, below the 0.3% increase economists had predicted. On a yearly basis, core PCE came in at 3%, compared to forecasts of 3.3% and down from July’s reading of 3.3%.
The softer data can also be attributed to the change in system made by the government. The Bureau of Economic Analysis revised how it calculates prices for three categories: legal services, computer software, and investment or portfolio management.
Two of those categories, software and investment advice, have shown price increases over the past year, and some economists noted that those increases had been inflating the overall numbers. The BEA’s methodology change, applied retroactively back to 2021, lowered the core PCE reading for July by 0.36%.
Despite the softer reading, inflation is still above the Fed’s target of 2%, which opens up the possibility of another rate hike before the year ends, whether in October or December.
The report also showed personal income rose 0.2% in August, below the expected 0.4% increase. Personal spending jumped 0.9%, outpacing projections of a 0.8% growth.
Energy prices were the cause of most of August’s price increases, with gasoline prices up 4.4% and transportation services rising 1.4%. Energy goods and services climbed 2.3%, while goods and services prices rose 0.3% each.
Fed official had already set the tone
A day before the report was released, New York Fed President John Williams pushed back on the notion that rates would be raised again.
Speaking in Buffalo, New York, Williams said he sees “no need for urgency” when it comes to another rate increase, WSJ reported.
“We have time to gather more information. The accumulation of more data should provide greater clarity on the underlying trends in the economy and the associated risks to achieving our goals and thereby the appropriate setting of monetary policy.”
However, Williams shared that he still expects one more rate hike before the end of the year to bring inflation back to the Fed’s 2% target faster, hinting at a “late this year” timeline. This has been interpreted as pointing to December instead of the upcoming October meeting.
Source:: Fed Rate Hike Odds Drop as US PCE Data Comes in Softer Than Expected