Hold steady or cut rates as scheduled? Tonight's PCE will "add fuel to the fire" for next week's Federal Reserve decision

According to the Zhitong Finance APP, the latest performance of the inflation indicator favored by the Federal Reserve is about to be released. The U.S. Department of Commerce will publish the Personal Consumption Expenditures Price Index (PCE) for September tonight, which is a key piece of data disclosed before the Federal Reserve's interest rate decision next week. Recent U.S. economic data has been relatively strong, seemingly reinforcing the market's "soft landing" expectations, but some voices in the market have also put the option of skipping interest rate cuts on the table. Deutsche Bank released a report stating that if the core PCE data is stronger than expected, maintaining the current rate will also come into view.

In August, the U.S. Personal Consumption Price Index rose by 2.2% year-on-year, with commodity prices falling by 0.9% and service prices rising by 3.7%. Therefore, inflation this week may reach the Federal Reserve's target level of 2%.

Alan Detmeister, an economist at UBS who previously worked for the Federal Reserve, said, "We are returning to the level we should be at." He expects the Personal Consumption Expenditures Price Index for September to be around 2.1% or 2%, adding that this is mainly due to the recent drop in energy prices, especially gasoline prices.

However, he stated not to get used to the 2% level, "We expect it to rebound in the coming months." Detmeister anticipates that energy prices will not continue to fall as they have in the past, but he noted that the overall trajectory of inflation is getting back on track.

Belinda Román, an economics professor at St. Mary's University in San Antonio, Texas, said this is good news, but "perhaps the not-so-good news is its internals." If we observe the composition of the latest Personal Consumption Expenditures Price Index, we will find that service prices rose nearly 4% year-on-year in August. This is largely due to the slow decline in housing prices.

In addition, the service industry often requires a large workforce, and after a tight labor market in recent years, many service sector wages have increased. Román pointed out that these wages "tend to be sticky, which can also lead to inflation." Therefore, calculating wage trends is an important component of assessing inflation trends.

Don Kohn, a member of the Federal Open Market Committee (FOMC), stated that he expects Federal Reserve policymakers to closely monitor the Employment Cost Index, which will also be released on Thursday. Kohn said, "You can understand how wages for the same job change over time."

He added that there is no formula to calculate whether or when the Federal Reserve will cut rates again, or how much the cut will be. Policymakers will not only focus on the overall numbers of personal consumption expenditures; they will also pay attention to the details: the costs of services, food, and energy, and they will pay special attention to trend lines.

Alan Detmeister, an economist at UBS, said that while reaching a 2% inflation rate is important for the credibility of the Federal Reserve, it is not a magic number. He stated that as long as inflation remains low and relatively stable, the U.S. economy can operate equally well at a 1% inflation rate and a 3% inflation rate, which is what truly matters.

Expectations for Maintaining Current Rates Heat Up?

Yesterday, the U.S. ADP employment data, known as the "little non-farm," far exceeded expectations, with the hiring pace of U.S. companies in October nearly reaching its fastest pace in over a year, showing a remarkable increase in labor demand. This data is of significant predictive importance for U.S. non-farm employment data In addition, a series of strong economic data previously indicated that the "soft landing" scenario anticipated by Federal Reserve officials seems to be getting closer. Recent reports of month-on-month retail sales growth, better-than-expected non-farm employment data, upwardly revised long-term GDP forecasts, and initial jobless claims that have generally met expectations are all sending positive signals.

Top U.S. economist and finance professor at the Wharton School, Jeremy Siegel, recently stated that the Federal Reserve may keep interest rates unchanged at next week's meeting. Siegel noted that while nearly all investors believe the Fed will cut rates by 25 basis points again in November, an exceptionally strong non-farm employment report released this Friday could overturn those expectations.

This week, Deutsche Bank also released a forecast report, suggesting that the possibility of the Fed "skipping a rate cut" is now in sight. Deutsche Bank considered the five rules typically cited by the Fed, along with other rules and balancing methods, and believes there is still room for further rate cuts. Most of their estimates show that current rates are 100 basis points or more above the neutral rate.

Regarding the Fed's rate cut space, the bank stated that if the neutral rate is close to the Fed's long-term median estimate, there would be significant room for cuts. Overall, the Fed should be able to comfortably cut rates next week, and a 25 basis point cut in December is also possible; it is still too early to plan for a pause.

However, the bank also pointed out in the report that persistent inflation combined with easing risks in the labor market will provide strong support for the expectation of skipping a rate cut. If the core PCE disclosed this time is above target and the job market shows robust conditions, the Fed may consider skipping a rate cut in next week's decision