On Wednesday, Federal Reserve Chair Jerome Powell explained the central bank’s current thinking on inflation in a speech at the Brookings Institution. The next day, with impeccable timing, October’s inflation figures turned out to be broadly consistent with his remarks. Inflation is coming under control, but the problem is far from solved; interest rates still need to go higher, but the pace of tightening can be eased a little.
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The Fed’s next policy-rate decision will be announced on Dec. 14. Investors had already penciled in a 50 basis-point increase, down from the 75 basis points announced after each of the Fed’s four previous meetings. Powell’s remarks went along with this — and so did the slower-than-expected rise in the Fed’s preferred measure of core inflation. The increase in the price of personal consumption expenditures excluding food and energy was 0.2% in October, giving a year-on-year rise of 5.0%. That was a bit lower than private forecasters had predicted.
Yet, as Powell emphasized, it’s too soon to celebrate. Personal spending is still strong. Friday’s payroll data showed an unexpectedly fast rise in employment last month and the biggest increase in hourly pay since January. This raises doubts over whether demand is cooling as quickly as needed. Core PCE inflation of 5% is still far too high. And an arguably better measure of core prices (based on median PCE, which strips out the biggest fluctuations, not just those for food and energy) was up 5.7% in the year to October, only slightly down from the previous month.
All this suggests that the Fed’s biggest concern can’t yet be ruled out: Without further tightening, inflation might settle at far too high a rate. The range for the current policy rate is 3.75% to 4%; add 50 basis points in December, and it will still be negative in real terms. The Fed has been tightening very rapidly by its own past standards, and monetary policy is now much less accommodative than in the spring, but the policy rate isn’t yet “restrictive” in the ordinary sense.
Read the full article here by The Bloomberg Editors, Advisor Perspectives.
