There's lots going on this November – will one of those things be another rate cut?
We’ve already reported that market traders have been predicted another big mortgage boost next November as they favor a bumper size interest rate cut by the fed – and now there are fewer reasons for the Fed to hold steady.
Figures released today show the Federal Reserve's preferred inflation measure, the personal consumption expenditures (PCE) price index, showed a greater-than-anticipated drop to 2.2% in the year to August. This decline opens the door for the Fed to possibly reduce interest rates again in November.
Economists had forecast a 2.3% increase in the annual inflation rate, following July's 2.5% figure. In response to the data, the US dollar index, which compares the dollar to a basket of six major currencies, slipped by 0.2%.
The Fed implemented its first rate cut since the pandemic last week, lowering rates by half a percentage point and signaling that further reductions could be on the horizon. Jay Powell, the Federal Reserve Chair, has emphasized the central bank's commitment to maintaining a strong labor market while managing inflation. The Fed targets a 2% inflation rate.
The state of the US economy is a focal point in the upcoming November presidential election, and the recent rate cut has sparked criticism from Republican candidate Donald Trump. Trump has voiced concern over the Fed's handling of inflation under President Joe Biden's administration, which saw inflation peak in 2022.
Market expectations regarding the Fed's next move are mixed. Investors are divided between the likelihood of a quarter-point or a half-point cut at the central bank's meeting following the election. “If the Fed wants to cut by another 50 basis points in November, the inflation data isn’t going to stand in their way,” said Omair Sharif, economist at Inflation Insights to the Financial Times.
However, Torsten Slok, chief economist at Apollo, told the newspaper a smaller rate cut might be more appropriate. “August’s figure for core PCE, which strips out volatile food and fuel prices, argues for a smaller quarter-point cut in November,” he noted.
Core PCE, which excludes food and energy prices, rose by 2.7% annually, in line with economists' predictions and slightly up from the 2.6% increase recorded in July. Slok added, "Overall the trend in inflation is certainly looking better. Things are moving in the right direction for the Fed."
Although core PCE is higher than the headline figure, due to housing price inflation and the exclusion of falling energy prices, it still indicates an overall improvement in inflation trends.
In reaction to the report, yields on two-year US Treasury bonds, which are highly sensitive to interest rate changes, fell slightly to 3.59%. Wall Street also reacted positively, with the S&P 500 rising by 0.2%, and the tech-heavy Nasdaq Composite gaining 0.1%.
President Biden welcomed the inflation figures, stating that they showed inflation was nearing pre-pandemic levels, at a time when "interest rates have fallen." He also highlighted the strength of the economy, noting that incomes, savings, and consumer spending were performing better than previously projected.
Meanwhile, Donald Trump criticized the current administration for allowing inflation to surge during their term, which peaked in 2022 and placed a financial strain on American households.
Adding to the optimism surrounding the economy, the University of Michigan's consumer sentiment index rose to its highest level since April, reaching 70.1. Joanne Hsu, director of the university’s consumer survey, remarked, “This increase was seen across all education groups and political affiliations. Furthermore, all five index components gained, led by a 6% surge in one-year business expectations. The expectations index is now 13% above a year ago and reflects greater optimism across a broad swath of the population”.
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