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The FOMC meets next week to decide whether or not to reduce rates for the third time this year.
The federal government is back to producing economic reports, although they are now more than two months old, so they are not as up-to-date as they usually are.
This is particularly notable regarding the release of the Personal Consumption Expenditures (PCE) report on Friday.
The PCE report measures inflation and is the preferred inflation gauge of the Federal Open Market Committee (FOMC) when determining the path of interest rates.
Due to the lengthy government shutdown, the PCE reports in recent months have been delayed. Now that it’s open again, we’re getting older reports first – with the latest from September.
So, the PCE inflation rate reported Friday, while not from the previous month, as it normally would be, did show that inflation rose 0.3% in September. Further, it revealed that inflation has jumped 2.8% over the prior 12 months from last September. That’s up from 2.7% in August, but it is lower than the 2.9% increase that economists expected.
Core PCE, which excludes food and beverage, increased 0.2% in September and rose 2.8% since last September. That is in line with consensus projections.
The FOMC will consider this data in making its decision on interest rates when it meets next Tuesday and Wednesday, but it won’t likely have much of an impact. One, the data is not as current as it could be, and two, inflation, while rising, appears to be less of a concern than the labor market.
Jobs Are a Bigger Concern
The recent ADP jobs report showed that the private sector lost 32,000 jobs in November, the fourth month of net job losses this year. As maximum employment is the other side of the Fed’s dual mandate, it is probably much more worried about the labor market than inflation right now.
“With the Fed meeting next week the big debate is whether they can cut rates to support the job market with inflation above their target and this morning’s PCE numbers show that inflation is stable, so they will be able to cut interest rates by 25 bps, although there will likely be some discussion – and potential dissent – about inflation remaining sticky and not approaching the 2.0% target any time soon,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said.
The September PCE report did nothing to change the overwhelming sentiment of the Fed cutting rates next week by another 25 basis points. The CME FedWatch survey of interest rate traders shows that 87.2% anticipate a rate cut next week. That’s up from 86.4% a week ago.
So, a rate cut still looks highly likely next week; the bigger question is, what does the Fed signal about the path of rates going forward?
“Despite the likelihood of next week’s rate cut, markets will be looking to see how the Fed – and especially Fed Chair Powell – describe the outlook for next year as the future path of rate cuts is much more controversial than whether or not a single 25 bps cut this month is warranted,” Zaccarelli said.
The FOMC meets December 9 and 10.