The latest inflation data provided further signs that the Federal Reserve is closing in on its goal, following the central bank’s notable interest rate cut just a few weeks ago.
September’s consumer and producer price indexes aligned with expectations, indicating that inflation is steadily approaching the Fed’s 2% target.
Economists at Goldman Sachs believe the Fed may have already hit this mark. The investment bank projected that the Commerce Department’s personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, will show a 12-month rate of 2.04% for September.
If accurate, that figure would round down to the Fed’s 2% target, marking a significant achievement a little over two years after rising prices spiked to a 40-year high, triggering a series of aggressive interest rate hikes.
Chicago Fed President Austan Goolsbee echoed this optimism, noting that inflation has significantly cooled, and the job market has stabilized near full employment. However, maintaining control won’t be easy while price increases are slowing down.
The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is… We’d like to get both of them to stay in the space where they are right now.”
Austan Goolsbee, Chicago Fed President
Market Gains Momentum as Price Increases Begin to Fade
The latest data shows that although prices aren’t retreating from previous highs, the pace of increases is slowing.
The all-items consumer price index rose 2.4% over the past year, while the producer price index, a proxy for wholesale inflation, posted a 1.8% annual rate in September. Meanwhile, the Cleveland Fed’s tracking also supports Goldman’s projection, estimating a PCE rate of 2.06% for September.
Core Inflation Pressures Persist as Fed Weighs Rate Cuts Amid Housing Cooldown
That said, challenges remain for policymakers. Core inflation, which excludes volatile food and energy prices, is expected to run at 2.6% for September, per Goldman, while the consumer price index’s core inflation was even higher at 3.3%.
The Fed attributes much of the core inflation to high shelter costs, which officials expect will ease as falling rent trends filter through the data. Fed Chair Jerome Powell, addressing housing inflation on September 30, said he expects rents to continue declining, contributing to broader disinflationary trends.
Lower inflation could give the Fed room to keep cutting rates, but caution is warranted, particularly regarding the labor market. The Fed’s recent half-point rate cut, which lowered the target range to 4.75% to 5%, was unprecedented for an economy still in expansion, and officials are likely to revert to smaller, quarter-point cuts.
Atlanta Fed President Raphael Bostic even suggested that skipping a rate move in November might be a consideration.
PNC’s Senior Economist, Kurt Rankin, warns that aggressive rate cuts could reignite demand, pushing businesses to raise prices again as they struggle to meet consumer demand, thereby undoing recent progress in taming inflation.
This result would in turn put pressure on businesses to meet that demand, re-igniting gains in those businesses’ own costs as they jockey for the necessary resources to do so.”
PNC Senior Economist, Kurt Rankin
What’s Next for the Fed?
Looking ahead, the Federal Reserve faces a delicate balancing act. While inflation is nearing the Fed’s target, core inflation pressures remain a concern, particularly in the housing sector.
The Fed will need to carefully weigh future rate cuts to avoid overstimulating demand and causing a rebound in price increases.
As the economy stabilizes, investors and policymakers alike will be watching closely to see how the Fed navigates the path forward, particularly with the potential for smaller, quarter-point cuts or even a pause in rate moves in the coming months.
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