Proactive Investors - Inflation is dropping faster than expected, with initial projections of 3.9% for the year revised down to 3.7%, which could prompt the Federal Open Market Committee (FOMC) to recalibrate its inflation projections.
From a June projection of 3.9%, the full-year core Personal Consumption Expenditures (PCE) inflation was revised to 3.7% in September. Recent data suggests a potential decline to 3.4%, with a 2.5% 6-month annualized change in core PCE prices expected in the upcoming release.
Analysts at UBS predict that when the December economic projections are released, they will show the FOMC might cut interest rates in 2024, possibly twice.
“In order to explain such an outlook for next year, we expect participants to describe any such rate cuts as still being 'restrictive for longer,' and to communicate more broadly that the real rate remains restrictive even as nominal rates fall,” UBS analysts wrote.
Looking ahead to the overall economic picture, there are signs of a slowdown from 2024 to 2026.
Despite improvements in labor supply, recession indicators derived from the household survey have surfaced in the wake of the October employment report. The rise in the unemployment rate over the last six months is attributed to weaknesses in household survey employment.
UBS analysts emphasized that the debate over whether this situation is different hinges more on survey measurement than any genuine surprise in labor supply.
“For the same labor supply, if household survey employment had risen as much as nonfarm payroll employment over the last six months, the unemployment rate would be 3.26%,” analysts noted.