Inflation showed signs of cooling off in September, aligning with expectations for another potential interest rate cut at the upcoming Federal Reserve meeting. The Fed’s preferred inflation metric increased by 2.1% on an annual basis in September, consistent with predictions. The month-over-month price rise stood at 0.2%, as reported by the personal consumption expenditures index released by the US Department of Commerce. The Federal Reserve had previously embarked on raising interest rates three years back when inflation began to surge, peaking at 9.1%.
The expectation was that higher interest rates would slow down the economy as borrowing costs increased, yet unemployment has remained relatively stable at 4.1%, and consumer spending has held up strongly. Heather Boushey, an economist from the White House Council of Economic Advisers, recalled that forecasters were skeptical about reducing inflation without triggering a recession. Core inflation, which strips out volatile food and energy prices, rose by 2.7% annually and has been persistently high over the summer. Housing and healthcare costs continue to push prices upward.
The combination of recent inflation data and some signs of a cooling job market have experts largely convinced that the Fed will implement a quarter-percent rate cut next week. This follows a surprising half-percent federal funds rate cut in September, lowering the rate to a range between 4.75% and 5% after a year of holding rates at historic highs to combat runaway inflation. Understanding how inflation impacts everyday finances is crucial as we head into the latter part of 2024 and beyond.
Inflation measures the price increase of goods and services. It isn't inherently negative, as rising prices can indicate a growing economy with confident consumers. However, when price increases surpass wage growth, purchasing power diminishes, meaning you're buying less for the same amount. This situation occurred post-pandemic, prompting the Fed's intervention in early 2022 to regain control over inflation rates. The Fed expressed 'greater confidence' in September that inflation was steering toward its target of 2%.
Nevertheless, despite the slower pace, prices remain high for many consumers, leading to widespread financial adjustments, especially during the holiday season. Regarding the future of interest rates, despite the largest rate reduction since 2008, the half-percent cut hasn't significantly affected consumer interest rates. Real relief for borrowers will require additional rate reductions and time for those changes to take effect. Jumbo interest rate cuts are unlikely in the near term as the Fed is expected to remain cautious about core inflation.
According to Armando Gonzalez, CEO of Bigdata.com, though the headline personal consumption expenditures figure supports rate reductions, the persistent nature of core inflation suggests careful monitoring. He anticipates a further 0.25% reduction at November's meeting. The consensus among experts is that additional rate cuts may emerge in 2025, potentially easing mortgage and credit card interest rates. However, such cuts would also lower returns on savings products like certificates of deposit and high-yield savings accounts, and while some rates have started to decline, there remains an opportunity to maximize earnings in the interim.
