Title: Federal Reserve’s Latest Data Shows Cooling Inflation, Increasing Odds of Rate Cut
In a surprising turn of events, the Federal Reserve’s core PCE price index revealed that core price pressures continued to cool more than expected in November. Core inflation has only maintained a modest annualized rate of 1.9% over the past six months, suggesting a subdued economy.
This fall in inflation brings the Federal Reserve’s target of 2% within reach, thus relieving policymakers who were concerned about a potential resurgence in inflation. The personal consumption expenditures (PCE) price index also matched forecasts, recording a 0.1% decrease in November.
Moreover, the annual headline inflation rate dropped to 2.6%, below previous estimates of 2.9%, supporting the notion that inflation is under control. However, the Federal Reserve primarily focuses on core inflation, which only rose 0.1% in November, lower than anticipated.
The core 12-month inflation rate eased to 3.2%, also falling short of expectations. Consequently, market pricing now indicates an 86% probability of a rate cut during the March 20 meeting, with a 48% chance of rate cuts totaling 1.75 percentage points next year.
The declining inflation rates are causing concern over the current federal funds rate range of 5.25% to 5.5%, as they may now appear too restrictive. Additionally, supercore services inflation, which excludes housing prices, increased by a mere 0.12% for the second consecutive month in November, leading to a 3.5% decline in the 12-month supercore services inflation rate.
The broad-based disinflationary trend offers reassurance to the Federal Reserve that a sudden surge in price pressures is improbable. In November, personal income rose as expected by 0.4%, while personal consumption expenditures saw a slight increase of 0.2%, falling short of the predicted 0.3% rise.
Following the release of the inflation data, the S&P 500 experienced a 0.4% boost, reflecting positive investor sentiment. Notably, the S&P 500 has been rallying in light of the substantial drop in the 10-year Treasury yield, which decreased by three basis points to 3.86% on Friday.
As the economy continues to exhibit signs of cooling inflation, the Federal Reserve faces mounting pressure to consider rate cuts. These developments may have a significant impact on the country’s financial landscape in the coming months, potentially easing borrowing costs and stimulating investment activity.
