Why a rate cut? Fed's favorite price gauge likely to show tamer 'core' inflation.
2024-12-12
Category: economic

By Jeffry Bartash
PCE index comes out after next week's Federal Reserve meeting, but CPI and PPI provide plenty of clues
Armed with consumer and wholesale inflation reports, Wall Street economists predict the Federal Reserve's favorite price gauge will show just a mild increase in November and justify an interest-rate cut.
The PCE price index, which is due at the end of next week, is likely to show a 0.2% increase in the so-called core rate that excludes food and energy.
Some analysts even think a slimmer 0.1% increase is possible.
Either number would come as a relief to the Fed after back-to-back 0.3%  increases in the core rate in October and September.
The Fed views the PCE as the best measure of U.S. inflation, with the core rate being the most important. Food and energy prices can jump up and down in the short run and make it harder to discern longer-term trends in inflation.
The PCE report won't come out until after the Fed's big meeting next week, but officials have enough evidence by now to know what it is going to show.
The headline PCE index, meanwhile, could show an increase of 0.2% to 0.3%.
If Wall Street is right, the 12-month rate of U.S. inflation based on the PCE would rise to 2.6% from 2.3%.
That would push it further from the Fed's 2% goal.
The core rate, meanwhile, would either hang tight at 2.8% or perhaps rise a tick.
Why, then, would the Fed still cut interest rates?
Most central bank officials believe inflation will begin to trend lower again by next spring, and they think interest rates are too "restrictive."
In Fed lingo, that means rates are still high enough to depress economic growth and even to increase unemployment.
The Fed wants to move to what it refers to as a neutral interest rate - one that is neither high enough to depress growth nor low enough to stimulate the economy.
After a December rate cut, however, Wall Street DJIA SPX widely expects the Fed to pause further reductions until it receives clear evidence inflation is trending lower again.
"They will want to proceed cautiously in 2025 in case inflationary pressures rebound," said Bill Adams, chief economist at Comerica.
-Jeffry Bartash
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