Central bank considering rate-cutting path ahead
Inflation in the US appears to be cooling down, which could give the Federal Reserve more room to shift its focus toward protecting the labor market.
The consumer price index (CPI) for September is projected to increase by just 0.1%, the smallest rise in three months. This would bring the year-over-year inflation rate to 2.3%, marking the sixth consecutive slowdown and the lowest rate since early 2021.
The Bureau of Labor Statistics will release its official CPI report on Thursday, which will be closely watched by Fed policymakers. The inflation gauge that excludes the more volatile categories of food and energy – a measure that gives a clearer picture of underlying inflation – is expected to rise 0.2% month-over-month and 3.2% compared to September 2023.
This inflation moderation comes on the heels of a stronger-than-expected job growth report for September. The combination of slowing inflation and robust labor market data may influence the Federal Reserve's decisions in the coming months.
What does it mean for Fed rate cuts?
The 254,000 new jobs added in September came as a surprise to many economists. The unemployment rate also dropped to 4.1% from 4.2% in August, while wage growth accelerated to 4%.
This strong labor market performance, alongside cooling inflation, suggests the Fed may opt for a smaller interest rate cut when it meets in early November.
“Across every dimension, the September employment report showed a job market that was stronger than expected,” said Mike Fratantoni, chief economist of the Mortgage Bankers Association. “Job growth exceeded expectations with a 254,000 gain for the month, and the prior two months’ data were revised upwards by a cumulative 72,000 gain. The unemployment rate dropped from 4.2% in August to 4.1% in September.”
While these figures point to a strong job market and raise hopes for a "soft landing" as the economy navigates the Fed’s inflation-targeting policies, Fratantoni said that wage growth re-accelerated to 4%, a factor that could slow down the expected pace of interest rate cuts.
Fratantoni also noted that while job gains were strong, they were concentrated in a few sectors, such as food services, health care, construction, and government hiring. He warned that spending in certain areas, like restaurants and bars, could be at risk if consumers continue to pull back on discretionary spending.
Will mortgage rates stay steady?
Fed Chair Jerome Powell has hinted that the central bank is likely to make quarter-point rate cuts at its final two meetings of the year.
Fratantoni commented on the potential impact on mortgage rates.
“Interest rates jumped on the release of this report,” Fratantoni added. “MBA’s forecast is for longer-term rates, including mortgage rates, to remain within a relatively narrow range over the next year. This news will push mortgage rates to the top of that range, but we do expect that mortgage rates will stay close to 6% over the next 12 months.”
Bloomberg economists expect the September CPI report to show mild overall inflation but a stronger core reading. They believe the data will likely align with the Fed's 2% target for core inflation.
“We expect a subdued headline CPI in September, though a more robust core reading,” the team of economists said. “Altogether, we don’t think the report will do much to sway the FOMC’s confidence that inflation is on a durable downtrend.”
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Additional data releases this week could further shape the Fed's outlook. On Friday, the producer price index (PPI) will offer insight into inflationary pressures faced by businesses, while the University of Michigan's preliminary consumer sentiment index for October will provide clues about consumer expectations and spending habits.
Fed officials, including Neel Kashkari, Alberto Musalem, Adriana Kugler, and Raphael Bostic, are set to speak in the coming days, which may offer further hints on how the central bank plans to manage the delicate balance between inflation control and labor market support.
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