The Federal Reserve appeared less likely to raise interest rates in October following the release of government data on Wednesday, September 30, showing that inflation rose less than anticipated in August. The Personal Consumption Expenditures (PCE) Price Index increased 3.4% over the 12 months ending in August, according to the Bureau of Economic Analysis. This figure was lower than the 3.7% increase that economists had forecasted.
The new data follows a period where inflation has remained above the Federal Reserve's long-term target of 2%. In July, the PCE index also showed a 3.4% annual increase after a downward revision. As the central bank weighs its next move, it faces a backdrop of national elections scheduled for November 3, where economic issues, including gas prices impacted by Middle East conflict, have become a focus for voters.
On Wednesday, September 30, futures contracts indicated that traders saw only a one-in-three chance of a rate hike at the Federal Reserve's meeting on October 27-28. This shift in market expectations followed comments on Tuesday, September 29, from New York Fed President John Williams, who stated he saw "no urgency" for an immediate follow-up to the rate increase implemented in September. However, Williams noted that another hike by the end of the year would likely be necessary.
Sal Guatieri, a senior economist at BMO, noted that 51% of price categories are still rising faster than 3% annually. While this is a decrease from 54% in the previous month, Guatieri stated it provides little reason to think the underlying trend in inflation has improved meaningfully. This maintains pressure on the central bank to consider further policy tightening later in the year to reach its 2% objective.
Looking ahead, the Federal Reserve will review several key indicators before its October 27-28 meeting. These include a monthly jobs report scheduled for Friday, October 2, and a report on September consumer inflation. These data points will help the Federal Open Market Committee determine whether to maintain the current rate or implement a hike by December, as many traders currently expect.