Benign Inflation Today Keeps Fed Rate Hike At Bay: Economists Expect Powell To Hold Steady After Latest Data, Markets Find Relief

The Federal Reserve’s preferred measure of inflation came in broadly in line with the consensus of Wall Street economist expectations in September, effectively solidifying already heightened expectations that the Fed will refrain from raising rates again next week.

The personal consumption expenditure price index data marked the last obstacle to overcome before the highly anticipated Federal Open Market Committee meeting on Oct. 31-Nov. 1.

Economists now seem more confident the Fed might avoid raising interest rates further, despite the central bank suggesting this very possibility by year’s end in its September economic projections.

Economists Lean Toward Fed Holding Rates Steady

The Federal Reserve’s preferred measure of inflation indicated signs of a slowdown in September, according to Sam Millette, senior market strategist for Commonwealth Financial Network.

Core PCE inflation fell to the lowest level in over two years, which highlights the significant progress made by the Federal Reserve in curbing inflationary pressures. While acknowledging the fight against inflation is far from over, Millette said the Federal Reserve will maintain the federal funds rate at its current level at the upcoming meeting.

Jeffrey Roach, chief economist for LPL Financial, said: “Core inflation continues to lose speed.” The expert anticipates that, after several months of robust consumer spending, demand is poised to decelerate in the coming months, which would contribute to additional downward pressure on inflation.

Bill Adams, chief economist for Comerica Bank, observed that inflation remained stable in September according to the Fed’s preferred measure, and core inflation showed a decrease for the month.

Overall, inflation is expected to slow down in October, primarily due to lower gasoline prices, Adams said. The expert noted the Federal Reserve is likely to perceive the PCE report as a mixed picture.

Comerica suggests the Fed will maintain rates steady next Wednesday but also warns that vigilance is required regarding any potential resurgence in inflation and an openness to resume rate hikes if deemed necessary.

Joe Brusuelas, principal and chief economist for RSM US LLP, said this trend aligns with what the Federal Reserve aims to achieve, and it’s one of several reasons why he said that further rate hikes may not be necessary.

US core PCE inflation: over the past three months it's arrived at .299, .117 & .213. That's 2.4% at a 3-month average annualized pace. That is a trend the @federalreserve want to see sustained & one of a number of reasons why I think we are done with rate hikes.

— Joseph Brusuelas (@joebrusuelas) October 27, 2023

We "really think that the Fed is close to the end of the hiking cycle," DoubleLine Deputy CIO Jeffrey Sherman says. September's PCE report shows "that the Fed should continue to hold." @Nasdaq pic.twitter.com/9tTouZljRm

— Yahoo Finance (@YahooFinance) October 27, 2023

Markets Cheer Benign PCE Data: Tech Rebounds, Dollar Falls

U.S. stocks rebounded Friday, with the tech-heavy Invesco QQQ Trust QQQ rallying 1% at 10:30 a.m. in New York, following two straight sessions of heavy losses.

The broader S&P 500 ETF Trust SPY was only 0.1% higher, while Treasury yields held steady with the 10-year benchmark at 4.85% yield.

The U.S. dollar weakened, with the Invesco DB USD Index Bullish Fund ETF UUP down 0.2%, as traders reduced the marginal rate hike bets.

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