The US Department of Commerce announced that the core personal consumption expenditures (PCE) for October increased by 2.8% year-on-year, reaching a six-month high. This indicates that the process of cooling inflation is stagnating, which may affect the pace of interest rate cuts by the Federal Reserve in December. However, this contradicts the performance of the labor market data, as the number of continued claims for unemployment benefits has reached a three-year high, adding to the possibility of further rate cuts.
Background information: The Federal Open Market Committee (FOMC) meeting in November: The pace of rate cuts may slow down or even be postponed, neutral interest rate outlook.
Supplemental information: Federal Reserve officials support continued rate cuts, and even the hawkish officials have admitted that a rate cut in December is reasonable.
The US Department of Commerce released the October Personal Consumption Expenditures Index (PCE) last night. It increased by 2.3% year-on-year, in line with market expectations and slightly higher than the previous value of 2.1%. The monthly increase was 0.2%, the same as the previous value, also meeting market expectations.
However, the core PCE price index, which excludes energy and food, increased by 2.8% year-on-year, the highest growth since April this year, slightly higher than the previous value of 2.7%. Although it still meets market expectations, this data indicates that the process of cooling inflation in the United States is stagnating, providing a basis for the Federal Reserve’s patience in cutting interest rates in December.
The rise in service prices drove the increase in the core PCE
The rise in the core PCE index was mainly driven by the increase in service prices. The data shows that the monthly growth rate of core service prices in October reached 0.4%, the largest increase since March this year. This growth reflects the surge in investment management fees, echoing the recent rise in the stock market.
Other data released on the same day also showed economic vitality: personal spending in October increased by 0.4% month-on-month, and the initial annualized quarter-on-quarter growth rate of real GDP in the third quarter reached 2.8%, indicating that household and business spending still have resilience.
These data support the recent remarks of many Federal Reserve officials that they will not rush to cut interest rates as long as the labor market remains healthy and the economy continues to grow steadily.
On the evening of the 26th, the minutes of the November FOMC meeting released by the Federal Reserve also emphasized a cautious approach to rate cuts. According to the data, rate cuts will be implemented “gradually” if the inflation data does not meet expectations, and the pace of rate cuts may slow down or even be postponed.
When discussing the outlook for monetary policy, participants expect that if the data aligns with expectations, if inflation continues to decline to 2% and the economy remains close to maximum employment levels, then a gradual shift towards a more neutral policy may be appropriate.
Continued claims for unemployment benefits reach a three-year high
However, one piece of labor market data provides reasons for rate cuts. In the past seven days leading up to November 23rd, the number of continued claims for unemployment benefits increased by 9,000 to reach 1.907 million, reaching a three-year high. This indicates that many unemployed individuals may face long-term unemployment difficulties, reinforcing the view that finding a job is more difficult for the unemployed compared to the period of high inflation a few years ago, adding to the possibility of the Federal Reserve cutting rates again in December.
In addition, the number of initial claims for unemployment benefits decreased by 2,000 to 213,000, lower than the market’s expected 216,000 and lower than the previous week’s 215,000 (revised from 213,000). This indicates that although companies are not actively hiring, they also have a low willingness to lay off employees, as they are willing to retain their workforce. This helps support stable economic growth in the United States and avoid a recession.
Based on recent economic data, although there is still pressure on core inflation, the labor market has shown resilience, and consumer spending continues to support economic growth. The US economy may be approaching a “soft landing.”
Economists are paying close attention to Black Friday sales to assess consumer momentum. Retail giants such as Target, Best Buy, and Walmart have extended their holiday promotion activities to attract discount-seeking consumers.
However, some analysts have pointed out that many consumers rely on credit cards and loans for support, and there are signs of rising delinquency rates among young and low-income groups, reflecting increased financial pressure.
FedWatch: Probability of a rate cut in December rises to 68%
After the release of economic data on Wednesday, the latest data from the CME FedWatch tool shows that the market has slightly increased its bet on a 1-point rate cut in December, rising from about 66.6% yesterday to the current 68.2%, with only a 31.8% probability of a pause in rate cuts.
At the same time, both the market and institutions predict that the Federal Reserve will slow down the pace of rate cuts next year. Nomura Securities’ latest forecast indicates that the Federal Reserve will pause rate cuts at the December interest rate meeting and only cut rates by 1 point in March and June 2025. Lin Qichao, Chief Economist at Cathay United Bank, stated last week that the Federal Reserve will still cut rates by 1 point in December this year and another 1 point in March and June next year. Matthew Luzzetti, Chief Economist at Deutsche Bank, predicts that the Federal Reserve will make its last rate cut in December this year, with a magnitude of 1 point, and may then pause rate cuts for the entire next year.