New Inflation Data Won’t Change Fed Interest Rate Tack

Economic reports this week are highlighted by Wednesday’s release of an inflation measure favored by Federal Reserve policymakers.

Hotter-than-expected inflation could prompt the Fed to pause rate cuts, while a disappointing jobs report might encourage a cut.

Inflation has remained above the Fed’s 2% target and is likely to stay above it next year. However, this may not alter the Fed’s trajectory for cutting interest rates, Nicholas Jasinski and Liz Moyer reported for Barron’s Daily.

The core Personal Consumption Expenditures (PCE) price index, excluding food and energy prices, has risen by 2.6% or 2.7% on an annual basis each month since May.

Economists expect it to rise to 2.8% for October. Fed Chair Jerome Powell has warned that the path to lower inflation will be uneven.

The Fed’s 2% headline inflation target does not imply that all prices across the economy are rising at 2% simultaneously. The Consumer Price Index basket includes roughly 80,000 items, with some prices increasing faster than 2% and others slower.

Only two more economic reports will be released before the Fed’s mid-December policy meeting: the November jobs report on Dec. 6 and the Consumer Price Index on Dec. 11. Hotter-than-expected inflation could prompt the Fed to pause rate cuts, while a disappointing jobs report might encourage a cut.

Futures traders are nearly evenly split on the Fed’s next move.

As of Sunday afternoon, the CME’s FedWatch tool projected a 53% probability of another quarter-point cut and a 47% probability that rates will remain steady. Minutes from the Fed’s November meeting are due out Tuesday.

This week will also see the release of the second estimate for third-quarter GDP. Economists surveyed by FactSet expect the economy to have grown by 2.8% from the second quarter, matching the first estimate published in October.