This week's inflation data provided further evidence that the Federal Reserve is close to its target, following the central bank's dramatic interest rate cuts just a few weeks ago.
Both the consumer price index and the producer price index for September were close to expectations, showing that inflation is moving below the central bank's 2% target.
In fact, Goldman Sachs economists think the Fed may already be there.
Wall Street investment banks estimated Friday that the Commerce Department's personal consumption price index for September will show a 12-month inflation rate of 2.04% when it is released later this month.
If Goldman is right, that number would be reduced to 2% and in line with the Fed's long-term objective, more than two years after inflation reached a 40-year high and revealed an aggressive round of rate hikes. interest rates. . The Fed prefers PCE as its gauge of inflation, although it uses a variety of data to make its decision.
“The general trend over the 12, 18 months is clearly that inflation has come down a lot and the labor market has cooled to a level where we think there is full employment,” Chicago Fed President Austin Golsby said in an interview with CNBC on Thursday. after the latest Consumer Price Data is released “We want them both to be where they are now.”
Some obstacles ahead
While keeping inflation under control may not be an easy task, recent data indicates that although prices are not falling from the worrying levels of a few years ago, the pace at which they are rising is slowing down.
The 12-month rate of the overall consumer price index was 2.4% in September, while the Producer Price Index, a proxy for wholesale inflation and a leading indicator of pipeline pressures, the annual rate showed 1.8 %.
Goldman's estimate that the PCE ratio is heading towards 2% is also consistent with the Cleveland Fed's tracking.
Central Bank District “Inflation is now releasingThe panel pegs the 12-month headline PCE rate for September at 2.06%, which will be rounded down to 2.1%. However, at an annualized rate, inflation for the entire third quarter stood at just 1.4% – below the Fed's 2% target.
Admittedly, there are some caveats that show policymakers still have some work to do.
Underlying inflation, which excludes food and energy and is a metric the Fed considers a good measure of long-term trends, is expected to reach an annualized rate of 2.6% for PCE in September, according to Goldman. Using only the consumer price index, core inflation was even worse in September, standing at 3.3%.
Fed officials, however, see the unexpectedly high shelter inflation number as a key driver of the key measure, which they say works through data on the downward trend in rents.
Fed Chairman Jerome Powell on September 30, dealing with rental situations, said he expects housing inflation to continue to decline as “broad economic conditions set the stage for more inactivity.”
From a political perspective, low inflation opens the door for the Fed to continue cutting rates, especially as it turns its attention to the labor market, although there is some trepidation about how quickly it should act.
September Half percentage point reduction A Fed funds rate range of 4.75% to 5% was unprecedented for an expanding economy, and the Fed is expected to soon return to its usual pace of a quarter of a percentage point. point. Atlanta Fed President Raphael Bostick even said on Thursday that he would be willing to skip a measure entirely at the November meeting.
“Aggressive easing would risk consumer demand rising as it stabilizes at an unsustainable pace,” said PNC senior economist Kurt Rankin in a post-PPI analysis. “This outcome will put pressure on companies to meet that demand, reigniting profits at the expense of those companies as they compete for the resources needed to do so.”
Futures traders are almost certainly betting that the Fed will cut by 25 percentage points at its November and December meetings.
