The latest Personal Consumption Expenditures report from the Bureau of Economic Analysis, the Federal Reserve’s preferred inflation measure, shows year-over-year average price increases of 2.8%. That was slightly under the Dow Jones-collected median forecast of 2.9%.
Many experts say the further report supports a rate cut by the Federal Reserve’s Federal Open Market Committee on Wednesday, December 10. In fact, CME Group’s FedWatch tool, which calculates probabilities of rate changes based on 30-day Fed Funds futures prices, suggested an 86.2% chance of a 25-basis-point cut and a 13.8% chance of no change.
However, the odds have been sliding. Even now, things may be a bit shakier than wished. The probability was 87.2% on Friday, September 5 and 90% on September 3.
The September data released on Friday was delayed because of the record federal government shutdown. There was already a September Consumer Price Index report, from the Bureau of Labor Statistics, that showed 3% inflation. The PCE and CPI measures are often out of sync because of different methodologies.
The chance of getting October information on inflation, or on jobs for that matter, is now zero. Some November data will be available, but only after the FOMC makes its decision. Right now, at least through September, inflation has remained elevated significantly above the central bank’s 2% target.
Inflation affects stable pricing, one of the dual congressional mandates on the Federal Reserve. So long as inflation remains higher, prices continue to rise and, except for some particularly volatile items like gasoline or food, are unlikely to drop again. Disinflation is something rarely discussed and yet a bane of economists because it might transform into an economic death spiral, with falling prices becoming lower corporate earnings, which translates into higher unemployment, then feeds shrinking consumer spending and coaxes companies into lowering prices to attract purchasing, restarting the cycle.
The other mandate is maximum employment. A major current concern of the Fed is the labor market’s condition. Market growth has depended almost entirely on healthcare and social assistance on one hand and leisure and hospitality on the other. College-educated workers in total represent 41.8% of the unemployed. Those with at least a bachelor’s degree make up 25.3% of the jobless rate, the highest figure since at least 1992.
The latest employment numbers from payroll processor giant ADP and the Stanford Digital Economy Lab showed a net loss of 32,000 private sector jobs in November.
At the same time, the newest initial unemployment claims of 191,000 for the week ending November 29 are extremely low. There was a week in 2022 when they were 189,000, as portfolio manager Eddy Elfenbein noted on X.com. Before that, the most recent lower point was the week ending September 6, 1969.
Although there is a good chance of a cut later this week, the supply of certainty at the central bank is at a low point. In late November, economists at Capital Economics saw a potential tie in an interest rate vote. It's going to be tough for members to get an accurate picture with key reports missing from October and November. But the continued weakening of the labor market could very well be the deciding factor.
That said, the discussion of December’s decision may be less important than the immediate future.
“Despite the likelihood of next week’s rate cut, markets will be looking to see how the Fed — and especially Fed Chair Powell — describe the outlook for next year as the future path of rate cuts is much more controversial than whether or not a single 25-basis-point cut this month is warranted,” wrote Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a note.
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