The Federal Reserve might have simply hit its 2% inflation goal

Federal Reserve Chairman Jerome Powell arrives for a press conference following the September meeting of the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Board Building on September 18, 2024 in Washington, DC.

Anna Moneymaker | Getty Images

This week's inflation data provided further evidence that the Federal Reserve is moving closer to its target, on the heels of the central bank's dramatic rate cut just weeks ago.

Consumer and producer price indices for September were both in line with expectations and showed inflation slipping towards the central bank's 2% target.

In fact, economists at Goldman Sachs believe the Fed could already be there.

The Wall Street investment bank forecast Friday that the Commerce Department's personal consumption expenditures price index for September will show a 12-month inflation rate of 2.04% when it is released later this month.

If Goldman is right, that number would be rounded down to 2%, right in line with the Fed's long-held goal, just over two years after inflation rose to a 40-year high and triggered an aggressive round of interest rate hikes has . The Fed prefers PCE as a measure of inflation, even though it uses a variety of inputs to make its decisions.

“The general trend over 12, 18 months clearly shows that inflation has fallen sharply and the labor market has cooled to a level that we believe is close to full employment,” Chicago Fed President Austan Goolsbee said Thursday in a CNBC interview following the release of the latest consumer price data. “We want both of them to stay in the room they are in.”

There are some obstacles ahead

While keeping inflation in check may not be an easy task, the latest data suggests that while prices are not retreating from their problematic highs a few years ago, the rate at which they are rising is slowing.

The 12-month rate for the headline consumer price index was 2.4% in September, while the producer price index, a gauge of wholesale inflation and a leading indicator of pipeline pressures, had an annual rate of 1.8%.

Goldman's forecast that the PCE index is heading towards 2% is also roughly in line with the Cleveland Fed's forecast.

The Central Bank District's Inflation Nowcasting dashboard puts the 12-month headline PCE rate for September at 2.06%, which would be rounded up to 2.1%. However, annualized inflation for the entire third quarter is only 1.4% – well below the Fed's 2% target.

There are certainly some caveats, which show that policymakers still have a lot of work to do.

Goldman said core inflation, which excludes food and energy and is a measure the Fed sees as a better gauge of longer-term trends, is expected to be at 2.6% annually for the PCE in September. Looking only at the consumer price index, core inflation was even worse in September at 3.3%.

However, Fed officials see higher-than-expected housing inflation numbers as the main driver of the core measure, which they expect will weaken as a lower trend in rents runs through the data.

Commenting on the rental situation, Fed Chairman Jerome Powell said on Sept. 30 that he expects housing inflation to continue to decline while “general economic conditions also set the stage for further disinflation.”

From a policy perspective, lower inflation opens the door for the Fed to cut interest rates further, particularly as it turns its attention to the labor market, although there are some concerns about how quickly it should move.

September's half-percentage point cut in interest rates to a fed funds range of 4.75% to 5% was unprecedented for an economy in recovery, and the Fed is expected to at least return to its normal quarter-point pace. Atlanta Fed President Raphael Bostic even said Thursday he would be open to foregoing a move altogether at the November meeting.

“Aggressive easing would risk consumer demand rising just as it settles into a sustainable pace,” PNC chief economist Kurt Rankin said in a post-PPI analysis. “This outcome would in turn put pressure on companies to meet this demand, causing those companies’ own costs to rise again as they struggle to find the resources necessary to do so.”

Futures traders are betting that the Fed will almost certainly cut interest rates by a quarter point at meetings in November and December.

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