In the year leading to August, the personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, fell to 2.2%, exceeding the expectations of the economists of a 2.3% rise and July’s 2.5% amount. This decrease opens the way for a possible cut of the interest rate in the month of November. Moreover, the US dollar index dipped 0.3% after the publication of this data.
For the first time after the pandemic, the Fed cut the interest rates by half a percentage point. Fed Chair Jerome Powell made clear that central banks are still committed to the goal of sustaining a strong labor market and, at the same time, managing the level of inflation, which target is still set at 2%. With the economy being a crucial element in November’s presidential elections, Donald Trump criticized last week’s rate cut.
The next choice of the Fed expected in November thrills the markets, which are fertile soil for speculations of all kinds. Most of all, 45% of investors are betting on a lighter quarter-point reduction. Torsten Slok, Apollo's chief economist, advocates that the August core PCE figure matching the forecasts and being slightly greater than July’s 2.6%, backs the hypothesis of a more uncertain quarter-point cut.
A very popular idea shares that maybe the disregard of the fall in energy prices and the influence of insistent housing inflation makes the Core PCE stay greater than the headline figure. Following its data announcement, a decrease to 3.57% of two-year Treasury yields happened. Those yields are known to move inversely to prices. In the meantime, on Wall Street, there were mixed reactions: the S&P 500 closed down at 0.13%, and the Nasdaq slipped to 0.4%.
United States President Joe Biden rejoiced about the inflation numbers, interpreting them as a good sign of a return to a pre-pandemic level, welcoming the comeback of a stronger economy with rising incomes, consumer spending, and greater savings. On the other side, ex-president Donald Trump strongly disapproved of the present administration, remembering the harsh 2022 inflation that put many American households in crisis.
An optimistic touch was also expressed by the University of Michigan’s consumer sentiment index, which kept rising to a strong 70.1 level, setting a record that was unreached ever since April. The survey's director, Joanne Hsu, noticed that while the index is still below its historical average level, consumers are much more aware of the slowdown of inflation, and this seems to be increasing confidence. Despite this positive news, the head of US economic research at Fitch Ratings, Olu Sonola, stated that her personal skepticism is due to the fact that August's inflation data would move the Fed towards a larger rate cut than half-point in the month of November.