Fed's Key Inflation Measure Declines More Than Anticipated, Easing Market Concerns

The Federal Reserve’s key inflation measure for November fell short of expectations, providing a sense of relief to markets on Friday after the central bank had warned earlier in the week about increasing price pressures for the upcoming year.

The Personal Consumption Expenditures (PCE) price index rose by 2.4% in November 2024 compared to a year ago, which was up from 2.3% in October. This figure was below the economists' forecast of 2.5%. However, it was the second consecutive monthly increase in this important inflation gauge.

On a month-to-month basis, the PCE index edged up by 0.1%, a slowdown from the 0.2% increase seen in October.

When excluding more volatile categories like food and energy, the core PCE rate remained stable at 2.8% year-over-year, also falling short of the expected 2.9%. Monthly growth for core PCE slowed to 0.1%, down from the previous 0.3% and below the forecasted 0.2%.

Alongside inflation figures, the report indicated that personal income grew by 0.3% month-over-month in November. This was a decrease from the 0.5% rise in October and did not meet the anticipated increase of 0.4%. Personal spending rose by 0.4%, slightly under expectations but consistent with October’s growth, suggesting strong consumer activity as the holiday season approaches.

Market Effects From the Data

The weaker-than-expected November PCE report may offer relief to markets that had experienced increased volatility following the Federal Reserve's meeting earlier this week.

During their meeting on Wednesday, the Fed indicated a slower pace of interest rate cuts and raised its inflation forecasts for 2025 and beyond, maintaining a more hawkish position.

The Federal Reserve now expects headline PCE inflation to reach 2.5% next year, an increase from the September estimate of 2.1%, with a projection of 2.1% for 2026, up from a previous estimate of 2%. Similarly, core PCE inflation is anticipated to be 2.5% in 2025 (up from 2.2%) and 2.1% in 2026 (revised from 2%).

Fed Chair Jerome Powell further tempered market expectations with his announcement of a "new phase" in monetary policy, indicating caution in easing conditions as interest rates near their neutral level.

Before Friday's inflation data release, money markets had already priced in 65 basis points of total rate cuts for the next year.

Market Reaction: Dollar Weakens and Stocks Adjust

• The U.S. dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF (UUP), fell by 0.3%.
• Futures for major U.S. indices reduced their premarket losses, with S&P 500 contracts initially down by 0.7% at 8:35 a.m. in New York. The S&P 500, as represented by the SPDR S&P 500 ETF Trust (SPY), closed 0.1% lower on Thursday, marking an over 3% decline since the Fed's meeting.
• Gold prices surged 0.6% to $2,610 per ounce.
• Bitcoin (BTC/USD) saw a slight rebound after the news, climbing back above $95,000, reducing its daily losses to 2%. Prior to the week's Fed meeting, Bitcoin had achieved an all-time high of $108,364.

inflation, PCE, markets