New pricing data released Thursday reinforced expectations that the Federal Reserve will hold interest rates steady at its next meeting in December while stopping short of declaring victory in the central bank's fight to bring down inflation.
New comments from two Fed officials Thursday backed that up. New York Fed President John Williams said another drop in the Fed's favorite price index is welcome, but that inflation remains "too high" and the Fed’s work is "not nearly done."
San Francisco Fed President Mary Daly said in an interview published by a German newspaper that rates are in a "very good place" but that it is too soon to talk about hikes being over or when cuts could begin.
"I’m not thinking about rate cuts at all right now," she said. "I’m thinking about whether we have enough tightening in the system and are sufficiently restrictive to restore price stability."
The comments follow a fresh read on the Fed’s favored inflation measure — the core Personal Consumption Expenditures index — that showed inflation is continuing to slowly come down.
Core PCE clocked in at 3.5% for the month of October, down from 3.7% in September, continuing a downward trend from 4.3% back in June.
Core PCE is the inflation measure most closely watched by the Fed and therefore is watched closely by investors.
Before the release of the new numbers Thursday, investors had upped bets that the Fed was likely done hiking.
As of Thursday morning, markets were pricing in a 74% chance of an interest rate cut by the end of the Fed's May meeting. A month ago, markets had priced just a 38% chance of a cut in the same time period, per the CME FedWatch Tool.
Billionaire investor Bill Ackman even said this week he expects to the Fed to start cutting sooner than markets anticipate.
The last time the Fed's Federal Open Market Committee met, it elected to keep interest rates unchanged in a range of 5.25%-5.50%, a 22-year high. It meets for the last time this year on Dec. 12-13.
Williams, during a speech in New York, said the stance of monetary policy is "quite restrictive," and estimated to be the most restrictive in 25 years.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
"My assessment is that we are at, or near, the peak level of the target range of the federal funds rate."
But he also made it clear the Fed expects to hold rates steady for a while as it looks to get inflation down to a target of 2%.
"I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis," he said.
Williams added the caveat that if "price pressures and imbalances persist more than expected, additional policy firming may be needed."
Daly said that monetary policy was "in a very good place" now and that "we should simply be patient and remain vigilant."
Many Fed officials may need to see continued progress over the coming months on inflation before they can feel sure and pivot away from keeping rate hikes on the table.
If they declare victory too early, the fear is that language could contribute to a loosening of financial conditions and make it more difficult for the Fed to achieve its goal of getting inflation down to 2%.
Williams expects inflation to keep falling, forecasting inflation to fall to around 3% as a whole this year, then decline to around 2.25% next year, before closing in on 2% in 2025. Next year, he expects GDP to slow to 1.25% and the unemployment rate to rise to 4.25%.
Inflation measured by core PCE is now below where the Fed expected it to end this year. October core PCE was 3.5%; the Fed expected PCE to end the year at 3.7%.
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