The inflation indicator favored by the Federal Reserve is below expectations, and the interest rate cut expectations have slightly warmed
The annual core PCE price index in the United States for November is 2.8%, lower than the expected 2.90%, with the previous value also at 2.80%. This moderate performance may slightly warm expectations for the Federal Reserve to cut interest rates in 2025. Consumer spending increased by 0.4%, and personal income grew by 0.3%, both below expectations. After the data was released, traders anticipated that the Federal Reserve would pause interest rate cuts in January and increased bets on a rate cut in March. U.S. Treasury yields and the dollar fell, while major U.S. stock index futures rebounded
Zhitong Finance learned that the U.S. Bureau of Economic Analysis released data on Friday showing that the year-on-year core PCE price index for November in the U.S. was 2.8%, expected 2.90%, and the previous value was 2.80%. The year-on-year PCE price index for November in the U.S. was 2.4%, expected 2.50%, and the previous value was 2.30%. The mild performance of the Fed's preferred underlying inflation indicator in November indicates that policymakers are taking a step in the right direction towards seeking further interest rate cuts in 2025.
Details regarding prices show a general slowdown. Core service prices rose 0.2% month-on-month, the lowest level since August of last year. Core goods prices (excluding food and energy) fell for the first time in three months. The so-called "super core service inflation" (excluding housing inflation) rose 0.16% month-on-month and 3.51% year-on-year (stabilizing at the highest level since April).
The report also showed that consumer spending increased by 0.4% in November, while personal income grew by 0.3%, both below expectations. After adjusting for inflation, spending grew by 0.3%, indicating that consumers showed resilience during the critical holiday shopping season. This was mainly driven by a rebound in goods purchases compared to the previous month. Meanwhile, actual spending in the service sector was the lowest since the beginning of the year.
This data should help alleviate concerns among Fed officials regarding the inflation outlook. This week, Fed officials released their latest forecasts, indicating that prices and interest rates will rise in 2025. These new forecasts triggered a sell-off in the stock market as investors digested the hawkish expectations.
After the data was released, traders continued to bet that the Fed would pause interest rate cuts in January but increased bets that the Fed would cut rates in March, with another cut expected in October. U.S. Treasury yields and the dollar fell, while major U.S. stock index futures regained ground after the data was released. The yield on the 10-year U.S. Treasury bond fell by 4.6 basis points during the day to 4.522%. The dollar index DXY saw a short-term decline of nearly 20 points.
Despite this, data released on Thursday showed that the U.S. economy grew faster than previously expected in the third quarter, partly due to increased consumer spending. Strong consumer spending drove the annualized growth rate of the U.S. economy to 3.1% in the third quarter. Economists expect consumer spending to only slow slightly this quarter. The Atlanta Federal Reserve currently forecasts that U.S. GDP will grow by 3.2% in the fourth quarter. Federal Reserve Chairman Jerome Powell stated on Wednesday that the U.S. economy is performing exceptionally well, and he hopes it continues to do so.
Moreover, according to a report from the San Francisco Federal Reserve, both cyclical and non-cyclical inflation factors are rising again. San Francisco Federal Reserve President Mary Daly expressed her "very satisfied" view on the median expectation of two rate cuts by policymakers next year before the data was released on Friday, emphasizing that the Federal Reserve can take a slower approach.
