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Inflation Data Suggests Potential for Federal Reserve Rate Cuts in 2024

2023.12.01

 

Key Takeaways

  • October’s inflation data meets expectations, potentially influencing the Fed’s interest rate decisions.
  • Market anticipates possible Federal Reserve rate cuts in 2024 following stable inflation and income growth.

October Inflation Aligns With Forecasts

The U.S. Commerce Department reported that the personal consumption expenditures (PCE) price index, excluding food and energy, rose 0.2% in October, matching Dow Jones consensus forecasts. Year-over-year, the increase stood at 3.5%, a decrease from September’s 3.7%. This data could provide the Federal Reserve with grounds to maintain current interest rates, or even consider rate cuts in 2024.

 

Both personal income and spending increased by 0.2% in October, indicating that consumers are coping with inflation. This growth in spending, albeit slower than in previous months, aligns with the Federal Reserve’s goal to cool the economy and control inflation. Moreover, stocks rallied following the release, with the Dow Jones Industrial Average reaching a 2023 high.

Market Response and Future Rate Predictions

Following the inflation report, bond yields rose, and futures markets leaned towards the likelihood of the Federal Reserve holding or reducing rates. Currently, traders are pricing in up to five quarter percentage point rate cuts in 2024. This speculation is reinforced by the Federal Reserve’s preference for the core PCE measure over the consumer price index (CPI) to gauge inflation.

 

Initial weekly jobless claims slightly rose, while continuing claims reached their highest level since November 2021. These trends in the labor market suggest a softening job market, which could further influence the Federal Reserve’s stance on interest rates. Bill Adams, chief economist at Comerica Bank, noted that inflation is clearly slowing and the job market is softening faster than expected, hinting at the Fed’s possible pivot to rate cuts.

Federal Reserve’s Current Position and Outlook

New York Fed President John Williams expects inflation to hit the Fed’s 2% target by 2025, implying a need for sustained restrictive rates. The current federal funds rate is between 5.25%-5.5%, with the Fed pausing rate hikes in its last two meetings. The ongoing impact of previous rate increases on the economy is under close observation by the Federal Reserve.

 

Richmond Fed President Thomas Barkin reported a consumer slowdown, though not indicative of a recession. This regional insight aligns with the broader economic signals, suggesting a stable economy. Additionally, encouraging inflation news from the eurozone complements this outlook, with a decrease in headline inflation but a steady core rate.

 

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