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US Core PCE Seen Pushing for No More Rate Hikes

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Tomorrow sees the last bit of key economic data that will be released ahead of the FOMC meeting next week. It includes the Fed’s favorite inflation measure, Core PCE Index, which makes it pivotal for expectations for whether or not there will be a rate hike.

In his last appearance before the start of the pre-rate decision blackout, Fed Chair Jerome Powell essentially confirmed that there won’t be a rate hike at the next meeting. Barring something extraordinary, of course. However, what could shake up the markets is what the Fed signals after the rate decision, for what they will do in the final meeting of the year.

Setting Up the Expectations

In the Fed’s quarterly report, it showed that the majority of FOMC members believe that it will be necessary to hike once more before the end of the year. This view was reiterated at the last FOMC meeting. And, so far, no Fed member has come out to contradict it (although a couple have expressed their personal view that rates might not need to increase).

So, if the Fed doesn’t hike next week, as is widely expected, then it will have to in December in order to fulfill its own forecast. But, the majority of traders don’t believe that will happen, and markets are already priced in to expect the Fed to communicate at the next meeting that it won’t go through with the final hike. Or, at least, hint heavily in that direction.

What Could Shake Things Up

That narrative could suffer some modification if the upcoming data is significantly out of proportion with expectations. If inflation pressures remain in place, the Fed might opt to stay silent about the possibility of a rate hike in December, just to keep the tightening pressure up for a little longer. Therefore, if Core PCE were to come in above expectations, it could strengthen the dollar. Particularly if it were to beat consensus by 4 or more decimal points, because that would mean that core inflation had increased from the prior month, something that would really worry the Fed.

We have to remember that the last few months have seen headline inflation slowly rising. Generally the headline number is ignored, because it’s more volatile due to energy and food prices. Energy prices have been on the upswing through the last quarter, so naturally the headline rate will increase. What matters is that the core rate has kept going down. What matters even more for the Fed, is that the Core PCE Price Index keeps falling.

What’s Expected from the Data

US September Core PCE Index is expected to come in at 3.6% annual, down from the 3.9% prior. On a monthly basis, this would be 0.2% compared to 0.1% prior. Between 0.1-0.2% on a monthly basis fits within the Fed’s target range, but above that could lead investors to think the Fed will be more worried about inflation again.

At the same time, the US will release its personal income and spending data, which is expected to show that the US economy remains robust, despite the high interest rates. Personal Income is expected to grow at a 0.3% rate last month, but spending to rise even faster at a 0.5% rate. Remember that US credit card debt already passed a record $1.0T.

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