The Federal Reserve’s favorite inflation indicator cooled in October. For Wall Street, it’s another sign that central bank Chairman Jerome Powell may be ready to end his more than 20-month interest rate hike campaign sooner rather than later.

This is great news for consumers and businesses that have struggled with rising borrowing costs and inflation in recent years. Fast-growing companies in particular often rely on debt to invest in their expanding businesses, and the end of interest rate hikes would eliminate significant revenue shortfalls for them by 2024. The prospect of interest rate cuts would be even better for them. Due to lower lending rates, not only would the profits of many companies increase, but investors’ alternatives to stocks – especially government bonds and corporate bonds – would also provide lower returns. That would mean more money would flow into the stock market.

Signs of an inflation turnaround were clear in the latest inflation data released on Thursday. The personal consumption expenditures (PCE) price index rose less than 0.1% in October and just 3% from a year ago, the Bureau of Economic Analysis reported. In comparison, September saw a 3.4% year-on-year increase. Meanwhile, core PCE inflation, which excludes more volatile food and energy prices, rose just 3.5% year-on-year in October, compared with 3.7% in the previous month.

“The further decline in core PCE inflation in October will reinforce markets’ growing belief that rate cuts are imminent,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, said in a note Thursday on the data.

With commodity prices down more than 5% so far this year, companies have begun cutting prices for physical goods after years of pandemic-induced inflation. This trend continued in October, with goods prices falling 0.3% during the month, according to the PCE Price Index. This decline was offset by a 0.2% increase in service prices due to record domestic travel during the holiday season. But even inflation in the services sector — a category that includes a mix of components such as tuition and costs for housing, transportation and medical care — is showing signs of slowing.

October data showed lower spending on restaurants, bars and hotels compared to September, when prices for services rose 0.3%. And year-on-year, service sector inflation has fallen from its 2023 peak of about 5.8% to just 4.4% last month. That could mean the end of the Fed’s rate hikes.

“If you’re hoping that Jay Powell will continue to be hawkish in the coming months, the PCE services index is not your friend,” Harris Financial Group managing partner Jamie Cox said Thursday, downplaying the likelihood of further rate hikes. “A significant slowdown in inflation is underway. These data clearly mark the end of the interest rate cycle.”

Throughout the pandemic, lockdowns and supply chain chaos led to mass inflation in goods, but in recent years inflation in services has risen again as Americans travel and eat out again. In response to this shift in consumer spending, Fed officials have placed an emphasis on combating service price increases. And recent inflation data is giving many on Wall Street hope that the central bank is moving closer to that goal.

“Markets could be pleasantly surprised as inflation could cool faster than expected,” Jeffrey Roach, chief economist at LPL Financial, said Thursday. “Investors should expect more Fed officials to adjust their language as they prepare markets for a subtle shift in policy stance.”

Despite Wall Street’s hopes that the Fed will either end its rate hikes or even cut rates, Chairman Powell has so far made no more dovish comments. At an International Monetary Fund event in early November, he told reporters that he remains committed to meeting the central bank’s 2% inflation target by ensuring interest rates are “sufficiently restrictive.”

“We are not convinced that we have reached such a position,” he added.

However, some Fed officials appear to be coming to the conclusion that further rate hikes are no longer necessary. Atlanta Fed President Raphael Bostic said earlier this month that he believes interest rates are now “sufficiently tight to get us to the 2% inflation mark.”

And Fed Governor Christopher Waller said at an American Enterprise Institute event on Tuesday that he was “increasingly confident that policy is currently well positioned to slow the economy and bring inflation back to 2%.” Waller, widely seen as a more hawkish Fed official, further argued that the Fed “could begin to cut interest rates if inflation continues to ease.”

Of course, not every Fed official is convinced that inflation has been tamed. New York Fed President John Williams told a joint conference of the New York Fed and the Federal Reserve Bank on Thursday that “significant progress” had been made in slowing consumer price increases and “rebalancing” the economy : “Our work is far from done.” ”

“I am committed to achieving our longer-term inflation target of 2% and laying a solid foundation for our economic future,” he added.

There are still skeptics about the recent disinflationary trend on Wall Street. Brian Rose, senior U.S. economist at UBS Global Wealth Management, said Thursday that the Fed must maintain its “bias” toward higher interest rates to ensure inflation is truly under control. “Fed Chairman Jerome Powell will appear publicly on Friday and we expect him to be careful not to sound too dovish,” Rose argued.

However, even Rose pointed out that the Fed could “move to a neutral stance” by the end of January or end its rate hikes if inflation and the labor market continue to cool this month.

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Source : fortune.com

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