Inflation indicators accelerate upward, Fed officials cautious about easing policy
The latest data from the U.S. Commerce Department shows that the core personal consumption expenditures (PCE) price index, excluding food and energy prices, rose 2.8% year-over-year in October, accelerating from 2.7% in September and still above the Fed's 2% target level. Meanwhile, consumer spending increased 0.4% month-over-month, outpacing inflation growth, indicating that consumer confidence remains solid. In the minutes of the November meeting, Fed officials stated that they believe inflation is steadily moving toward the 2% target, but some participants noted that the timeline for reaching the target may be later than previously expected. Market analysts believe that the Fed may cut interest rates by 25 basis points in December, but will slow the pace of easing in 2025.
Core inflation rises for second consecutive month
Data released by the U.S. Commerce Department on Wednesday showed that the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices, rose 2.8% year-over-year in October, up from a 2.7% increase in September, accelerating for the second consecutive month and remaining persistently above the Federal Reserve's 2% target level. This data is an inflation indicator closely tracked by the Fed when formulating monetary policy.
On a month-over-month basis, the core PCE price index rose 0.3% in October, broadly consistent with recent monthly growth rates. Meanwhile, Personal Consumption Expenditures (PCE), which measures consumer spending, rose 0.4% month-over-month, growing faster than inflation, further confirming recent signs of solid consumer confidence.
Fitch Ratings: Disinflationary trend has stalled
"The disinflationary trend we saw earlier this year has essentially stalled, and we are entering a potentially bumpy inflation journey into 2025," said Olu Sonola, Head of U.S. Economic Research at Fitch Ratings, in an email comment. He added: "The Fed will be concerned and cautious." Sonola also noted: "The overall data continues to point toward a rate cut in December, while guiding 2025 at a very slow pace."
Fed meeting minutes: Achieving target may take longer than expected
Federal Reserve officials said at their November 6-7 monetary policy meeting that they believe inflation will steadily move toward the 2% target, though according to meeting minutes released Tuesday, a few participants indicated that the central bank's goal may be achieved later than previously expected.
The minutes stated: "Regarding the inflation outlook, participants indicated that they remain confident inflation is moving sustainably toward 2%, although several participants noted that this process may take longer than previously expected."
EY forecast: Rate cut in December but slowdown in 2025
Lydia Boussour, Senior Economist at EY, said Wednesday that after the central bank lowers its key interest rate by 25 basis points to a range of 4.25% to 4.5% at its December 17-18 meeting, it may slow the pace of easing next year.
"We believe that as policymakers more cautiously navigate toward a neutral policy stance, the Fed may decide to slow the process of recalibrating policy," she said in an email. Boussour expects the Fed could cut the federal funds rate by 1 percentage point in 2025, with 25-basis-point cuts at every other policy meeting. She specifically noted: "Importantly, risks are tilted toward less monetary policy easing in 2025-2026."
Economic growth and resilience in consumer spending
Economic growth and consumer spending have remained resilient this year despite recession forecasts. Data released by the U.S. Commerce Department on Wednesday showed that gross domestic product (GDP) grew at an annualized rate of 2.8% in the third quarter, following growth of 1.4% in the first quarter and 3% in the second quarter.
The Atlanta Fed on Wednesday raised its estimate for current-quarter GDP growth to an annualized rate of 2.7%, up from a previous estimate of 2.6%. Consumer spending remains strong amid rising confidence.
Consumer confidence rises to two-year high
"Consumer confidence continued to improve in November and reached the upper end of the range that has prevailed over the past two years," Dana Peterson, Chief Economist at The Conference Board, said in a statement Tuesday. Peterson noted that consumers' optimism about their financial situation over the next six months hit a new high, and the proportion of consumers expecting a recession in the next year fell to the lowest level since the organization began tracking this sentiment in July 2022.
She also said households' views on the labor market have improved. Commenting on the organization's November consumer confidence index, Peterson said that compared with the previous month, consumers were "noticeably more optimistic about future job availability, with this indicator reaching its highest level in nearly three years."