Cooling inflation will likely keep the Federal Reserve on pause in coming months, traders bet on Friday, even as persistent underlying price pressures amid strong consumer spending kept some chance of a rate hike later this year in play.
The personal consumption expenditures price index, which is the Fed's preferred inflation gauge, rose 3.4% in September from a year earlier, a Commerce Department's Bureau of Economic Analysis report showed on Friday, and the core PCE price index, which the Fed takes a signal for future price pressures, rose 3.7%. That's down from a 3.8% reading in August but well above the Fed's 2% inflation target.
Consumer spending rose 0.7% in September from August, more than economists expected.
Still, traders continue to price in no chance the Fed will lift its policy rate from the current 5.25%-5.5% range at next week's rate-setting meeting, and less than a 20% chance of an increase by the Fed's December meeting, based on futures contracts that settle to the U.S. central bank's target policy rate.
"Overall, spending remains positive, and inflation is slowing, a welcome combination for policymakers," wrote analysts at High Frequency Economics. "We continue to expect a slower pace of growth going forward and a further easing in price pressures, which should keep the FOMC on the sidelines for the rest of 2023."
Traders continue to expect a first Fed rate cut in June of next year, based on interest-rate futures pricing.