The Bureau of Economic Analysis has recently released its inflation index called Personal Consumption Expenditures (PCE). This index happens to be the Federal Reserve’s favorite gauge of inflation as well. In this index we saw that inflation rose less than expected, up 0.4% month over month in August. Core inflation, which strips out food and energy prices, rose only by 0.1%. Annually this PCE index is now at 3.5% and core PCE is at 3.9%, which is a 2-year low.
The Federal Reserve’s goal is to get annual core PCE down to 2% so we are slightly less than double the rate of inflation where they want to be, however, we have made a large leap lower. The peak for headline inflation was a whopping 7.1% in 2022 and 5.6% in core PCE also in 2022. Clearly, we have made some great progress. Will this progress be enough for the Federal Reserve to pause further rate hikes at their next meeting on November 1? The Federal Reserve kept the federal funds rate at a 22-year high of 5.25%-5.5% in its September 2023 meeting, following a 25 basis points hike in a prior meeting in July. Now they only have two meetings left this year. If they pause again, it could be the beginning of a possible turnaround in stock and bond market sentiment and depending on their tone, it could be the catalyst for a new trend in bond trading and lower mortgage interest rates.
Source: https://bit.ly/48Fyhfs
By: Jon Iacono