Fed's Favorite Inflation Data Friday Could Sway November Interest Rate Cut Odds

Market expectations for the Federal Reserve's next interest rate move could gain more clarity as early as this Friday, when a U.S. government agency releases a key inflation metric closely monitored by policymakers.

The Personal Consumption Expenditure (PCE) price index report, scheduled for release on Friday, Sept. 27, at 8:30 a.m. ET, will provide critical insights into August’s inflation trends.

As the Fed’s preferred inflation gauge, the PCE is seen as a crucial indicator that could influence decisions on whether another rate cut will occur at the next Federal Open Market Committee (FOMC) meeting on Nov. 7.

Currently, market-implied probabilities suggest a 60% chance that the Fed will enact a back-to-back 50-basis-point rate cut in November. The remaining odds are favoring a more modest reduction of 25 basis points, as per the CME FedWatch tool. However, this outlook could shift dramatically depending on how the upcoming PCE data performs.

Fed’s Confidence In Inflation Trajectory

“I estimate that the August PCE report will be very low,” Federal Reserve Governor Christopher Waller recently said. Earlier in the month, Waller reflected on July's PCE data, noting that the 6- and 3-month annualized rates stood at 2.6% and 1.7%, respectively.

"These numbers are good news and suggest that our restrictive policy stance has put us on the right path to attain our 2% inflation target," he added.

These comments, alongside the Fed’s focus on achieving its inflation goal, imply that another softer inflation reading could increase the likelihood of a back-to-back 50-basis-point rate cut in November.

August PCE Report: What Do Economists Expect?

• Economist consensus, as tracked by TradingEconomics, predicts that annual headline PCE inflation will fall from 2.5% in July to 2.3% in August, marking the lowest inflation rate since February 2021.
• On a month-over-month basis, the headline figure is expected to rise by just 0.1%, a slowdown from July's 0.2% increase.
• When excluding volatile food and energy prices, core PCE inflation is forecast to rise slightly, from 2.6% year-over-year in July to 2.7% in August.
• On a monthly basis, core PCE inflation is projected to maintain its 0.2% growth rate, consistent with the previous month.

Market Reaction: A Look Back at Previous PCE Reports

In the last two PCE reports, the U.S. stock market responded positively as the data indicated easing inflation.

When the July PCE report, released on Aug. 30, came in below expectations, it sparked a stock rally. The S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, surged 1%, closing at a record high. Meanwhile, tech stocks, represented by the Invesco QQQ Trust QQQ, outperformed, gaining 1.2%.

The June PCE report, released on July 26, met expectations, which helped boost investor confidence in the disinflation narrative. The S&P 500 rose 1.1%, while the SPDR Dow Jones Industrial Average ETF DIA jumped 1.6%.

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Image created using artificial intelligence via Midjourney.