The Fight Against Inflation: A Promising Update from the Federal Reserve

The Fight Against Inflation: A Promising Update from the Federal Reserve

The Federal Reserve’s ongoing battle against inflation seems to be back on track following a slight setback over the summer. This development holds significant importance for the market, which has been grappling with uncertainties surrounding interest rates.

According to economists surveyed by FactSet, the core personal-consumption expenditures index, also known as the core PCE deflator, is anticipated to have risen by 3.9% in August compared to the previous year. This would place it at its lowest level since September 2021. Such a decline is encouraging as it reflects a return to the overall downtrend experienced prior to July, when the inflation metric (excluding food and energy costs) briefly increased from 4.1% in June to 4.2%.

Scheduled for release at 8:30 a.m. Eastern on Friday, this data arrives at a critical time following the Federal Reserve’s recent decision on monetary policy. While the central bank maintained steady interest rates on September 20, they also indicated that borrowing costs might need to rise further in order to effectively curb inflation.

This message has had notable effects on the market, resulting in stock declines and significant surges in bond yields. The yield on the 10-year Treasury note—widely regarded as the U.S. mortgage benchmark—has now surpassed 4.6%, marking its highest level since 2007.

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Understanding Recent Inflation Reports

Federal Reserve Chairman, Jerome Powell, recently referred to the latest inflation reports as ‘good’ at a press conference. However, he stated that more evidence is needed before the Fed can confidently pause the rate hikes. Tom Essaye, founder of Sevens Report Research, suggests that a forthcoming tame core PCE price index reading could provide the Fed with another positive report to ease market anxiety.

Mixed Signals from PCE Inflation

While Powell’s optimism is encouraging, the headline PCE inflation, which includes food and energy prices, may paint a different picture. Economists predict a 3.5% rise in this metric for August, up from 3.3% in July and 3% in June.

Inflationary Pressure in Other Indices

Renewed inflationary pressure is also evident in both the consumer price index and the producer price index. This can be largely attributed to the recent surge in energy costs. West Texas Intermediate crude futures, considered a benchmark for the U.S. market, reached their highest levels in over a year this week, briefly exceeding $95 a barrel.

A Positive Outlook on the Fight against Inflation

Despite these challenges, data expected to be released on Friday should strengthen the perception that the battle against inflation is nearing its end as price growth starts moving closer to the Fed’s desired 2% annual target. Interest-rate futures now suggest a one-third probability of the bank raising rates again before mid-December.

The Core PCE Data as a Game Changer

The upcoming core PCE data has the potential to solidify or disrupt the dovish view on inflation. Its findings will undoubtedly contribute to shaping future monetary policy decisions.