Dive Brief:

• The inflation gauge most closely tracked by the Federal Reserve eased in October and consumer spending slowed, validating the decision by policymakers to forgo tightening since hiking the main interest rate in July to a 22-year high.
• The core personal consumption expenditures price index, which excludes volatile food and energy prices, rose 3.5% on an annual basis in October compared with 3.7% the prior month, the Commerce Department said Thursday. Consumer spending gained 0.2% in October, a marked decline from 0.7% in September.
• “The core inflation threat is receding faster than the Fed expected, and will likely continue to do so,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said Thursday in an email to clients, noting that Fed officials forecast core PCE will end the year at 3.7%. The central bank will probably trim the federal funds rate by 1.5 percentage points next year, beginning in March or May, he said.

Dive Insight:

Several Fed officials in recent weeks have become more outspoken about progress in curbing price pressures while cautioning against expectations of sustained disinflation or an imminent cut to borrowing costs.

The central bank since March 2022 has raised the benchmark interest rate from near zero to a range between 5.25% and 5.5%.

“My assessment is that we are at, or near, the peak level of the target range of the federal funds rate,” New York Fed President John Williams said Thursday, adding that “monetary policy is quite restrictive.”

At the same time, “the future remains highly uncertain and our decisions will continue to be data dependent,” Williams said in a speech. “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.”

During some previous tightening cycles, the Fed has reduced the federal funds rate only to see inflation rebound and require a renewed increase in borrowing costs.

“The latest inflation data are encouraging,” San Francisco Fed President Mary Daly told Börsen-Zeitung, a Frankfurt-based financial newspaper. “But we must not prematurely declare victory over inflation.”

“The worst thing we can do to Americans, whether it's businesses, households, consumers or community groups, is a stop-start monetary policy where we stop raising interest rates but then realize we're not done yet and have to do even more work down the road,” she said, according to the text of an interview released Thursday.

After an unexpected 5.2% surge in economic growth during the third quarter, the economy is showing signs of slowing, reined in by the most rapid monetary tightening in four decades.

Consumer spending — which fuels nearly 70% of economic grmowth — eased in October to the slowest pace since May. Retail sales fell 0.1% during October in the first decline since March.

Gross domestic product growth will probably decline during the current quarter to a 1.8% annual rate, the Atlanta Fed said in a forecast Thursday. The economy will probably slow further and only grow 1.25% next year, Williams said.

“Evidence has continued to accumulate suggesting that tighter monetary policy is biting harder into economic growth,” Atlanta Fed President Raphael Bostic said Wednesday while noting that slowing demand is inhibiting price increases.

“My staff and I are picking up clear signs that companies’ pricing power is diminishing” for providers of both goods and services, Bostic said. “That is, it is no longer easy to raise prices without resistance from customers.”

“We’re hearing reports of more and more companies sacrificing some profit margin to maintain market share,” he said, noting that “firms are increasingly offering discounts and price promotions or otherwise swallowing cost increases rather than risk chasing away customers.”

Many companies across the southeast U.S. are cutting annual pay raises from a range between 3% and 5%, to a range between 2% and 3%, Bostic said. “Taken together, the feedback from business contacts points to ongoing disinflation and a measured slowing in economic activity.”