The Federal Reserve Could Be Close to Hitting Its 2% Inflation Target
Recent inflation data shows the Federal Reserve (Fed) is getting closer to its goal of bringing inflation down to 2%. This comes shortly after the Fed made a big interest rate cut a few weeks ago.
Both consumer and producer prices for September were in line with expectations, indicating that inflation is trending down toward the Fed’s 2% target.
Economists at Goldman Sachs even believe the Fed might have already hit the mark. They predict that the personal consumption expenditures (PCE) price index for September will show a 12-month inflation rate of 2.04%. If they’re right, that number would be rounded down to 2%, which matches the Fed’s long-standing goal.
It has been over two years since inflation spiked to its highest level in 40 years, which led to a series of aggressive interest rate hikes. Now, inflation is cooling, and so is the job market, which is good news for the economy.
Challenges Still Ahead
Even though inflation is slowing down, there are still challenges. Prices haven’t gone down significantly, but the rate at which they’re increasing has slowed.
In September, the 12-month inflation rate for all items was 2.4%, and producer prices, which measure wholesale inflation, had an annual rate of 1.8%.
The Cleveland Fed also predicts the PCE index will show a 2.06% rate for September, close to Goldman Sachs’ estimate.
However, core inflation, which excludes food and energy prices, is expected to be higher, at 2.6%. This is still above the Fed’s 2% goal. The Fed believes high housing costs are partly to blame, but they expect those costs to decrease soon.
Fed Chair Jerome Powell recently said he expects housing inflation to go down and that overall economic conditions are improving, which could lead to lower inflation in the future.
What’s Next for the Fed?
With inflation dropping, the Fed may have room to cut interest rates again. In September, the Fed reduced the federal funds rate to a range of 4.75% to 5%. This was an unusual move for an economy that is still growing. The Fed may return to smaller rate cuts, and some officials even suggest skipping a rate change at the next meeting in November.
There’s still some caution, though. Cutting rates too fast could increase consumer demand, leading to higher costs for businesses as they try to keep up. That could push inflation up again.
Traders are currently betting that the Fed will cut rates by a quarter point at both the November and December meetings.
