Overview: There were no surprises from Wednesday’s highly anticipated Federal Reserve meeting. While the services sector data surpassed expectations, a wide range of other significant reports released over the past week were right on target, and their net impact was minor. Mortgage rates ended the week with little change.
As expected, the Fed made no change in the federal funds rate and announced plans to begin scaling back its bond buying program, which was put in place near the start of the pandemic to help the economy recover. The Fed will reduce its bond purchases from the current pace of $120 billion per month by $15 billion per month beginning later in November. Regarding inflation, the meeting statement said that officials still anticipate that it will fall because current elevated readings are “largely reflecting factors that are expected to be transitory.” Little new information was provided to help investors pin down the exact timing of future rate hikes, which are expected to begin in the middle of next year.
The core Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed. In September, core PCE was 3.6% higher than a year ago, matching the consensus forecast. This was the same annual rate of increase as last month, but up from levels below 2% at the start of the year, and the highest annual rate since 1991.
Despite some obstacles, the services sector, which accounts for nearly 70% of US economic activity, continues to excel. The Institute for Supply Management (ISM) Services Index jumped to 66.7, which was far above the consensus forecast of 62 and a record high. Levels above 50 indicate that the sector is expanding, and readings above 60 are rare. According to many companies, difficulties in hiring enough skilled workers and supply chain disruptions are holding back even stronger growth.
Hampered by the spread of COVID and major supply chain disruptions in many industries, economic growth slowed last quarter. Third-quarter gross domestic product (GDP), the broadest measure of economic activity, showed annualized growth of just 2%, down from 6.7% during the second quarter. Consumer demand remains strong, however, and growth is anticipated to pick up as production issues ease.
Looking ahead, investors will continue to track COVID case counts globally. Beyond that, the key Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The Consumer Price Index (CPI) will come out on November 10. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services.
ISM Services Index