The case for quarter-point U.S. interest rate cuts at upcoming Federal Reserve policy meetings appeared intact on Friday after a report showed producer prices were flat last month compared with August, suggesting inflation continues on track toward the Fed’s target.
Financial markets priced in a 17% chance that the Fed will leave its target for short-term borrowing costs in the current 4.75% to 5.00% range when it meets in early November, up marginally from about 15% before the data.
But the bulk of bets remained on quarter-point reductions at each of the Fed’s meetings well into 2025, bringing the policy rate to the 3.50% to 3.75% range by the middle of next year.
The Fed delivered a half-a-percentage-point interest rate reduction last month in what policymakers termed was a “recalibration” of borrowing costs after a year of falling inflation and a slight cooling in labor markets.
The Fed targets 2% inflation as measured by the year-over-year increase in the personal consumption expenditures price index.
The producer price index, which feeds into the PCE measure, rose 1.8% from a year earlier in September, Friday’s report showed, a little more than economists had forecast but down from a 1.9% increase in August.
Taken together with the rise in the consumer price index reported on Thursday, analysts at Capital Economics estimate underlying PCE inflation for last month was running at a 2.9% annualized rate, more than in recent months.
That, along with stronger-than-expected job growth reported for September, is enough to “suggest more than a few Fed officials might regret starting their easing cycle with a bigger 50 basis point cut,” they wrote.
Even so, “the data aren’t strong enough to justify leaving rates unchanged.”
