Overview: Wednesday’s Federal Reserve meeting revealed no unexpected information and caused little reaction. Similarly, a key inflation report came in right on target and had just a minor impact. Mortgage rates ended the week lower but remain near the highest levels in decades.
As expected, the Fed made no change to the federal funds rate, and the statement released after the meeting was very similar to the prior one. Fed Chair Jerome Powell again emphasized that future policy decisions will be based on incoming economic data. He talked about the significant gains in bringing down inflation but also said that more work needs to be done. According to Powell, further progress is likely to require slower economic growth and some loosening of the labor market. Investors are still split about whether there will be another 25 basis-point increase in the federal funds rate before the Fed is done hiking.
The Personal Consumption Expenditures (PCE) price index is the inflation indicator favored by the Fed. In September, core PCE, which excludes food and energy to reduce short-term volatility, was up 3.7% from a year ago, matching the consensus forecast. This was down from an annual rate of 3.9% last month and the lowest level since June 2021. While it has come down significantly from its peak, Fed officials would like to see continued progress back to their target level of 2%.
Gross domestic product (GDP), the broadest measure of economic activity, has held up surprisingly well despite higher interest rates. During the third quarter, U.S. GDP rose at an annualized rate of 4.9%, above the consensus forecast and up from 2.1% during the second quarter of 2023. This was the highest reading since the fourth quarter of 2021. Consumer and government spending, business investment, and inventory growth were the strongest components. Early estimates for the fourth quarter are for slower growth.
Core PCE (annual % change)
November 3 — Employment Report
Institute for Supply Management (ISM) Services Index