Goldman Sachs: The Federal Reserve may have already reached its 2% inflation target

Goldman Sachs economists believe that the Federal Reserve may have essentially reached its inflation target.

According to Goldman Sachs' latest forecast released on Friday, the Personal Consumption Expenditures (PCE) Price Index for September, to be released by the U.S. Department of Commerce later this month, is expected to show a year-on-year increase of 2.04%. If Goldman Sachs' forecast is correct, this number will be rounded to 2%, aligning perfectly with the Federal Reserve's long-standing inflation target.

Goldman Sachs' forecast for the PCE Price Index is also in line with tracking data from the Cleveland Fed. The Cleveland Fed's "Inflation Nowcast" shows that the 12-month overall PCE inflation rate for September is 2.06%, rounded to 2.1%. On an annualized basis, the inflation rate for the entire third quarter is only 1.4%, well below the Fed's 2% target.

However, Goldman Sachs forecasts that the core PCE inflation rate, which excludes food and energy, is expected to be 2.6% on an annualized basis in September, significantly higher than the Fed's 2% inflation target. Using only the Consumer Price Index (CPI) calculation, the CPI report released on Thursday showed that the core inflation rate for September was even worse, reaching 3.3%.

Yesterday, prominent financial journalist Nick Timiraos, also known as the "New Fed News Agency," indicated that preliminary estimates suggest that the Fed's preferred inflation gauge - the core PCE Price Index - will show a lower increase in September compared to the CPI.

It is important to note that while the Fed considers multiple data points in decision-making, the Personal Consumption Expenditures Price Index is its preferred inflation gauge. Among them, the core inflation rate is seen by the Fed as a better measure of long-term trends.

Current Fed officials believe that unexpectedly high housing inflation data is a key driver of elevated core inflation, with the expectation that as the cooling trend in rents gradually becomes evident in the data, related inflation will ease. Fed Chair Powell mentioned in late September that he expects housing inflation to continue to decline, and the broader economic conditions are laying the foundation for further cooling of inflation.

The U.S. released two major inflation data for September this week, CPI and PPI. Overall, both the year-on-year and month-on-month increases in CPI and core CPI exceeded expectations, but the 2.4% year-on-year increase in CPI is still the lowest since February 2021. The month-on-month PPI remained flat compared to the previous month, indicating further cooling of inflation.

Analysts point out that while the September CPI and PPI inflation data had mixed results, the final readings were close to expectations, indicating that U.S. inflation is moving towards the Fed's 2% target, and the Fed is nearing its inflation goal.

However, it is certain that from the mixed inflation data released in September, caution is still needed, and Fed policymakers still have some work to do.

After the PPI data was released, Kurt Rankin, Senior Economist at PNC, stated: "Aggressive monetary easing policies may lead to a surge in consumer demand just as it stabilizes and reaches sustainable levels. This, in turn, will put pressure on businesses to meet demand, leading to a rise in their own costs as they compete for necessary resources to meet demand." Yesterday, Atlanta Fed President Bostic, who is not considered a hawk this year, said that based on the recent mixed data, he maintains an absolutely open attitude towards pausing rate cuts in November.

After the release of two major inflation data this week, traders are almost certain that the Fed will cut rates by a quarter point at the November and December meetings