The Fed could pause rate hikes after December if it wants because the core PCE was 1.8% which is below its 2% target. That would ease concerns over the flattening yield curve.

Month over month core PCE inflation was up 0.1% which missed estimates and September’s growth rate which were both 0.2%. Year over year core inflation fell from 1.9% to 1.8%, missing estimates for 1.9%. Just like headline PCE, core PCE comparisons will get tough especially starting in March. In March 2018, core inflation increased from 1.66% to 1.96%.

The October core PCE reading is important because it’s the last reading before the December 19thFed meeting. With the Fed’s favorite inflation reading falling below its target, the Fed can easily turn dovish. The Fed can justify its guidance change by repeating this data which will help it dodge criticisms of the decision being political or following the whim of the stock market.

There’s an 81.8% chance of a hike in December. That hike is a given. The real story is if it is a hawkish or dovish hike. The dot plot will be critical because the Fed has rates ending 2019 between 3% and 3.25% even though the Fed funds futures only expect one more hike after the one in December 2018 (bringing rates to 2.5% to 2.75%). The Fed ignored the inflation weakness in 2017 and raised rates 3 times because its forecasts expected higher inflation. However, 2019 is different from 2017 as growth has been slowing (in 2017 it was accelerating). The labor market is much stronger, but that won’t last long with 3 hikes in 2019.

Inflation

The Fed Has Justification To Pause Rate Hikes

Submitted December 04, 2018 at 09:32PM by AlexPitti https://ift.tt/2FYjvHx