Jerome Powell, the Federal Reserve Chairman, held a press conference following the September meeting of the Federal Open Market Committee on September 18, 2024, at the William McChesney Martin Jr. Federal Reserve Building in Washington, DC.
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This week’s report on inflation has suggested that the Federal Reserve is making significant progress towards its target. This follows the central bank’s significant cuts to interest rates just a few weeks ago.
Both the consumer price index (CPI) and producer price index (PPI) data for September aligned well with expectations, indicating a gradual decrease in inflation as it moves toward the Fed’s 2% goal.
Economists from Goldman Sachs believe the Federal Reserve may be on the verge of achieving that target.
Wall Street analysts projected on Friday that the upcoming personal consumption expenditure (PCE) price index, set to be released by the Commerce Department later this month, might indicate a 12-month inflation rate of 2.04%.
If Goldman’s assessment is accurate, this figure would effectively round down to 2%, matching the Fed’s long-standing inflation objective, even as inflation rates reached their highest levels in 40 years. This progress follows more than two years of aggressive interest rate hikes by the Fed. Notably, the Fed prefers the PCE index as its primary measure of inflation when making its decisions.
Chicago Fed President Austan Goolsby highlighted in a CNBC interview on Thursday that “the overall trend over the past 12 to 18 months shows a significant decline in inflation, and the job market has cooled to what we would consider full employment.” He expressed desire for the situation to stabilize post the latest consumer price release.
Challenges Ahead
While controlling inflation remains a challenge, recent data indicates that although price levels have not returned to the peaks observed in previous years, the rate of inflation is indeed slowing.
For September, the 12-month rate for the consumer price index across all categories stood at 2.4%, whereas the producer price index, which acts as an indicator of wholesale inflation, showed an annual rate of 1.8%.
The anticipation that the PCE index will trend towards 2% aligns with findings from the Cleveland Fed’s current inflation tracking analysis. The district’s Inflation Nowcasting dashboard estimates the 12-month headline PCE rate for September at 2.06%, which would round up to 2.1%. However, it is noteworthy that the annualized inflation rate for the third quarter was only 1.4%, well below the Fed’s 2% target.
It is important to note, however, that there are several complexities indicating that policymakers still face challenges ahead.
Core inflation, which excludes volatile sectors like food and energy, is viewed by the Fed as a more reliable indicator of long-term trends. According to Goldman Sachs, core inflation is anticipated to remain at an annual rate of 2.6% for September. In contrast, using the CPI, the core inflation figure for that month was even less favorable at 3.3%.
Fed officials believe that an unexpected surge in housing costs has been a significant factor contributing to core inflation rates, although they expect this trend to moderate as rent data begins to show a decrease.
Chairman Jerome Powell remarked on September 30 that he foresees a continued decline in housing-related inflation while noting that “overall economic conditions signal a trend toward further disinflation,” especially concerning rental prices.
From a policy viewpoint, a reduction in inflation would allow for additional rate cuts. However, uncertainty prevails regarding the speed of such actions. The recent half-point cut in the federal funds rate to a range of 4.75% to 5%, particularly during a period of economic growth, is considered an unusual maneuver. Furthermore, the Fed is now operating at least a quarter-point below its usual pace. Atlanta Fed President Rafael Bostic even mentioned on Thursday that he might consider pausing policy adjustments at the November meeting.
“An aggressive approach to easing monetary policy could lead to a surge in inflation at a time when consumer demand is stabilizing,” noted Kurt Rankin, a senior economist at PNC. “This could compel companies to ramp up their output in response and restart increases in their own costs as they compete for necessary resources.”
Traders in futures markets are predicting that the Federal Reserve is likely to lower interest rates by a quarter-point in both the November and December meetings.
