While, in the case of strong consumer spending, continuing potential price pressures keep the possibility of the Fed raising interest rates later this year, traders are betting this Friday (27 October) and soaring inflation could put the Fed on hold for the coming months.
A report by the United States Department of Commerce's Bureau of Economic Analysis on Friday indicated that the personal consumer expenditure price index, the first inflation indicator chosen by the Fed, had increased by 3.4 per cent in September, compared to 3.7 per cent in September, while the Fed's core PCE price index, which signals future price pressures, had increased by 3.7 per cent. This is below 3.8 per cent in August, but well above the Fed's 2 per cent inflation target. Consumer spending increased by 0.7 per cent in September over August, higher than economists expected.
Nevertheless, traders continue to believe that the Fed will not raise the policy rate from the current 5.25-5.5 per cent at next week’s interest rate-setting meeting, and that the Fed’s interest rate at the December meeting is less than 20 per cent, as a futures contract based on the US Central Bank’s target policy rate.
The Fed is more concerned with core inflation, which better reflects long-term price trends. The core PCE peaked at about 5.6 per cent at the beginning of 2022 and has since been down, but still well above the Federal Reserve ' s annual target of 2 per cent. The Fed prefers PCE as its inflation indicator because it takes into account changing consumer behaviour, for example by replacing low-priced goods when prices rise.
Most markets ignored the report, with a small rise in stock market futures and a fall in the United States Treasury debt return.
“Although consumer prices are rising faster than expected a month ago, core inflation continues to slow, and the report is unlikely to change the Fed's view that inflation will slow in the coming months as demand slows. “In the end, after a few months of consumer spending exceeding income, expenditure will slow.
This is the last inflation report the Fed will see before the policy meeting next two days. According to the data of the Chiffon Institute, traders expect the Central Bank to announce near 100 per cent interest-free possibilities at the end of Wednesday.
“Generally, expenditures remain positive and inflation is slowing, a welcome combination for policymakers,” the analyst of High Freency Economics wrote. “We continue to anticipate a slowdown in future growth and a further easing of price pressures, which will enable the Federal Open Market Commission to remain on the lookout for the remainder of 2023.”
Dealers continue to expect that, based on interest rate futures pricing, the Fed will reduce interest rates for the first time next June.