Core PCE warming up does not hinder inflation trend! "New Fed News Agency": Fed expected to continue pause in rate hikes

The core PCE price index favored by the Federal Reserve, which was announced this Friday, showed an accelerated growth in September compared to the previous month, with the growth rate rising from 0.1% in August to 0.3%. However, according to journalist Nick Timiraos, who is regarded as the "mouthpiece of the Federal Reserve" and the "new Federal Reserve news agency," this is unlikely to change the market's expectations for the Fed's decision next week.

In an article written by Timiraos, it is stated that although the downward pace of inflation slowed in September and potential price increases accelerated, it is not enough to prompt the Fed to raise interest rates next week. The recent improvement in inflation is sufficient to convince Fed officials to maintain interest rates next week. The trend of inflation may lead the Fed to continue its pause in raising interest rates.

The article points out that although inflation is still at a high level, it has significantly cooled down during the past 20 months of Fed rate hikes. The annualized growth rate of core prices from April to September was 2.8%, which is still higher than the Fed's target of 2%, but it has slowed down significantly compared to the previous six months' annualized level of 4.5%.

The following screenshot from a Federal Reserve report published by Wall Street News shows that in the latest economic outlook released by the Fed last month, the median forecast for core PCE inflation this year was 3.7%. This means that even without taking into account the fourth quarter, the Fed has already exceeded their inflation reduction target for this year, as PCE inflation is significantly lower than the expected level for the whole year. This may strengthen the likelihood of the Fed maintaining its current stance.

However, Timiraos' article mentioned above also pointed out that some potential inflation price indicators closely monitored by Fed officials in September were stronger, such as service sector inflation excluding housing and energy. These indicators suggest that Fed policymakers may have reasons to consider the possibility of raising interest rates again in the coming months.

Currently, it is the quiet period before the Fed officials' interest rate meeting. Last Thursday, Powell reiterated in his last public speech on monetary policy before the quiet period that the Fed will "proceed cautiously" when considering the path of interest rate policy.

At the same time, Powell stated that inflation is still too high and it may take a longer period of economic slowdown and weak employment to reach the target level of inflation. If the trend of economic strength increases the risk of inflation rising, the Fed may consider raising interest rates again.

Powell mentioned that the tightening financial environment caused by the rise in long-term Treasury yields can affect the path of monetary policy. Powell also said that there is evidence that current monetary policy is not overly tight.

After Powell's speech, Timiraos wrote in his article that Powell's speech confirmed the market's expectation of no rate hike in November, "unless there is clear evidence that the economic resilience will jeopardize progress in reducing inflation." Timiraos mentioned that with the rapid rise in long-term interest rates, the cost of borrowing continues to increase, which may actually replace the Fed's rate hike.

In his article this Friday, Timiraos mentioned that Powell and other Fed officials had previously hinted that they might keep rates unchanged next week. These officials want to observe how the US economy responds to the Fed's rate hike and the rise in long-term US Treasury yields. The article also quoted a statement from Powell last week:

"It's possible that rates have not been kept high enough for a long enough time."