Federal Reserve Chairman Jerome Powell arrives for a news conference after the September meeting of the Federal Open Market Committee at the Federal Reserve's William McChesney Martin Jr. Building on September 18, 2024 in Washington, DC.
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This week's inflation data provided further evidence that the Fed is closing in on its target, following a large interest rate cut by the central bank just a few weeks ago.
Consumer and producer price indices for September came in around expectations, showing that inflation is drifting towards the central bank's 2% target.
In fact, economists at Goldman Sachs believe the Fed may already be there.
The Wall Street investment bank on Friday forecast that the Commerce Department's personal consumption expenditures 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 rounded to 2% and would be fully consistent with the Fed's long-sought target, just over two years after inflation rose to a 40-year high and unleashed a powerful round of interest rate hikes. . The Fed prefers the personal consumption expenditures index as a measure of inflation even though it uses a variety of inputs to make decisions.
“Clearly the general trend over 12 or 18 months is that inflation has come down a lot, and the labor market has slowed to a level close to… The level we believe is reaching full employment.” After the release of the latest consumer price data. “We would like to have them stay where they are now.”
Some hurdles ahead
Although keeping inflation under control may not be an easy task, the latest data suggests that although prices are not retreating from the alarmingly high levels they reached a few years ago, the rate at which they have risen is declining.
The 12-month average for the CPI for all items was 2.4% in September, while the Producer Price Index, an indicator of wholesale inflation and a key measure of pipeline pressures, showed an annual rate of 1.8%.
Goldman's forecast that the PCE index is headed to 2% is also in line with tracking from the Federal Reserve Bank of Cleveland.
The central bank district's Inflation Nowcast dashboard pegs the headline 12-month PCE rate at 2.06% for September, which will be rounded to 2.1%. However, at an annual pace, inflation for the entire third quarter was just 1.4% — well below the Fed's 2% target.
To be sure, there are some caveats that policymakers still have some work to do.
Core inflation, which excludes food and energy and is a measure the Fed considers a better gauge of long-term trends, is expected to reach an annual rate of 2.6% for personal consumption expenditures in September, according to Goldman Sachs. Using only the CPI, core inflation was worse in September, at 3.3%.
However, Fed officials see unexpectedly high housing inflation numbers as the main driver of the underlying action, which they believe will ease as the downward trend in rents makes its way through the data.
Addressing the rental situation, Federal Reserve Chairman Jerome Powell said on September 30 that he expects housing inflation to continue to decline while “broader economic conditions are also setting the stage for further contraction.”
From a policy standpoint, lower inflation opens the door for the Fed to continue cutting interest rates, especially as it turns its attention to the labor market, although there are some concerns about how quickly it should move.
The half-percentage-point reduction in September to the federal funds range from 4.75% to 5% was unprecedented for an expanding economy, and at the very least the Fed is expected to return to its normal quarter-point pace. Atlanta Fed President Rafael Bostic even said Thursday that he would be open to skipping the move altogether at the November meeting.
“Aggressive easing would risk consumer demand rising just as it stabilizes at a sustainable pace,” Curt Rankin, chief economist at PNC, said in a post-PPI analysis. “This outcome will in turn put pressure on companies to meet this demand, reigniting cost gains for those companies as they seek the resources to do so.”
Futures traders are betting with near certainty that the Federal Reserve will cut interest rates by a quarter of a percentage point at its November and December meetings.
