Falling Inflation Could Lead to Fed Cutting Rates


The Personal Consumption Expenditures (PCE) index, maintained by the Bureau of Economic Analysis (BEA), tracks prices, consumer spending and fluctuations in them month to month. It is also the Federal Reserve’s preferred measure of inflation. If you want a sense of what the Fed’s board might do before their last meeting of 2023 in December, the PCE can offer that.

Tracking economic indicators during October 2023, the latest report—released Nov. 30, 2023 – found that PCE was 3% in October. This is the lowest level in months (month-over-month changes had been 3.4% since July 2023). Excluding food and energy prices, the monthly change was 3.5%.

Personal Income increased by 0.2% ($57.1 billion), as did Personal Income Expenditures; these rates are also the lowest since summer. The PCE Price Index saw negligible change month over month in October (and, excluding food and energy, was only 0.2%). Disposable personal income increased by 0.3% ($63.4 billion). 

The PCE coming down in October is a sign of slowing inflation; The White House bragged of “the lowest inflation since March 2021” on November 30 following the report’s release. The markets are celebrating, too; the Dow Jones has hit its highest level of 2023, and investors are betting that the Fed will choose to hold rates at their last 2023 meeting, despite Chair Jerome Powell having previously projected another rate hike before the end of the year. 

Does this mean that the Fed might pivot and start to bring rates down after a hawkish pattern of raising or holding rates? While this may be within sight, it’s not quite in our grasp yet. 

John Williams, president of the New York Federal Reserve, predicts inflation will only hit the Fed’s intended 2% in 2025.

“I expect it will be appropriate to maintain a restrictive stance for quite some (time) to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis.”

Click here for the full release by the BEA.





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