PCE data is a mixed bag! Will the Federal Reserve still cut interest rates twice as scheduled this year?

The Federal Reserve may not have received the inflation data it wanted on Thursday, but some economists say the latest inflation data favored by the Fed could lead it to continue lowering rates by 25 basis points at next week's policy meeting.

Quincy Krosby, Chief Global Strategist at LPL Financial, stated that she still expects the Fed to announce a modest rate cut on November 7, while emphasizing that the inflation data released on Thursday was mixed, indicating that "the Fed's path to suppress inflation and declare victory remains bumpy."

Other economists who also anticipate a modest rate cut by the Fed in November acknowledge that there may be debate among policymakers about whether to pause rate cuts in November. A Fed observer noted that ultimately it will be up to Fed Chair Jerome Powell to maintain consensus on rate cuts. EY Chief Economist Gregory Daco stated:

“We expect Powell to again be the voice of reason, guiding the Federal Open Market Committee to cautiously ease monetary policy next week.”

The latest PCE price index shows a year-on-year increase of 2.1% in September, down from 2.3% in August, nearly reaching the Fed's 2% target.

However, the Fed prefers to focus on the "core" PCE price index, which excludes the more volatile food and energy prices. According to this measure, September's year-on-year inflation rate was 2.7%, unchanged from August, slightly above the expected 2.6%. On a month-on-month basis, core inflation was slightly higher than the previous month, rising by 0.3%, compared to 0.2% last month, but in line with expectations.

Before the PCE data was released, another inflation measure—the September Consumer Price Index—was better than expected.

The new data may provide more reasons for the hawkish members of the Federal Open Market Committee to argue that any future rate cuts should be gradual and cautious. After all, core PCE has remained at 2.7% for three consecutive months instead of declining.

Krosby said that next week, "the Fed needs to acknowledge that due to strong consumer spending, a series of successful strikes leading to wage increases, and a robust labor market, they need to take a 'gradual' approach to lowering rates until the Federal Open Market Committee is reassured that inflation will not continue to rise."

In the weeks following the rate cut in September, many officials, including Fed Governor Waller and Dallas Fed President Logan, have emphasized the need for "gradual" rate cuts.

Paul Ashworth, Chief North America Economist at Capital Economics, stated that Fed officials will be somewhat uneasy about the 0.30% month-on-month increase in core services (excluding housing prices), which is the largest increase in the past six months.

However, the dovish members of the Federal Open Market Committee can also point out that inflation is gradually cooling over a longer time frame.

The median forecast provided by all policymakers in September indicated that after a 50 basis point cut in September, there would be an additional 25 basis point cut in November and December. Investors still expect the Fed to cut rates by 25 basis points at next week's policy meeting After the PCE data was released on Thursday, this possibility remains well above 90%.

Following the release of inflation data, the Federal Reserve will also face another important data point: the non-farm payroll data released on Friday.

This report may not provide decision-makers with a clear assessment, as it could be affected by two major hurricanes. The hurricanes have temporarily left people in the affected areas unemployed, and Boeing has also experienced a labor strike.

Economists expect that due to the impact of the two hurricanes and the Boeing strike, the number of new jobs added in October will only be 113,000. This will be a decline from the unexpectedly strong 254,000 new jobs added in September, with the unemployment rate expected to remain at 4.1%.

Bill Adams, chief economist at Comerica Bank, stated, “The Federal Reserve may place less emphasis on the economic data for October, as there are clear reasons to expect temporary distortions in the data. Therefore, they may decide to lower the federal funds rate by 25 basis points only after next week's election and observe the December data to begin to understand the economic performance post-hurricane more clearly.”

Daco from Ernst & Young indicated that he expects the Federal Reserve to lower the policy rate by 25 basis points at every meeting until June next year, as economic growth is strong but slowing, and labor market trends are cooling.

However, Matt Luzzetti, chief economist for the U.S. at Deutsche Bank, stated that if core inflation accelerates again in the first quarter of next year, consistent with evidence of residual seasonal factors, “this would mean that the Federal Reserve's room to cut rates next year would be significantly reduced.”

Jeffrey Roach, chief economist at LPL Financial, added that investors “should be mentally prepared, as the road to reducing inflation to 2% will be long and arduous.”