US Stocks Advance as Inflation Moderates, Fueling Fed Easing Hopes
Data shows consumer spending growth slowed in September while a key inflation gauge met economist expectations, bolstering bets on future rate cuts.
Wall Street rallied on Friday after fresh economic data showed a moderation in both consumer spending and a key inflation metric, fueling investor optimism that the Federal Reserve may be positioned to begin cutting interest rates in the coming months.
The S&P 500 and Dow Jones Industrial Average both climbed higher in morning trading after the Commerce Department released its latest report on Personal Consumption Expenditures (PCE), an economic measure closely watched by the central bank.
The report showed that the core PCE price index, which excludes volatile food and energy costs, rose 0.2% in September, meeting economists' forecasts. On an annual basis, the metric held steady at 2.8%, a sign that inflationary pressures are not re-accelerating. At the same time, personal spending saw a 0.3% increase, a notable slowdown from the previous month's pace, according to the Bureau of Economic Analysis data.
For investors, the data provides a compelling narrative: the Federal Reserve's aggressive series of rate hikes is successfully cooling the economy without triggering a sharp downturn, paving the way for a policy pivot. The combination of slowing, but still positive, consumer activity and contained inflation bolsters the case for the coveted "soft landing" scenario.
"Inflation didn’t get any worse," was the key takeaway for many market participants, reinforcing the view that the Fed's next move is more likely to be a rate cut than a hike. That sentiment, as reported by MarketWatch, rippled through markets.
The reaction in the bond market was telling. Treasury yields dipped following the report's release, indicating that bond traders were increasing their bets on future Fed easing. Lower interest rates generally reduce the appeal of bonds while making stocks, particularly growth-oriented equities, more attractive by lowering borrowing costs for companies and increasing the present value of future earnings.
The data provides a crucial piece of the puzzle for Fed officials ahead of their next policy meeting. The central bank has held its benchmark rate steady for several months, emphasizing a data-dependent approach. Reports like this, which show progress on the inflation front without pointing to an economic collapse, give policymakers significantly more flexibility.
While the annual 2.8% inflation rate remains above the Fed's official 2% target, the lack of upward momentum is being interpreted as a victory. The market appears to be operating under the assumption that the trend is more important than the specific level, and the current trajectory suggests inflation will continue to drift lower.
Still, the path forward is not without risks. The labor market remains a key variable, and any signs of renewed wage pressures could complicate the Fed's decision-making process. But for now, investors are embracing the positive signals, as a cooling in consumer spending coupled with stable prices creates a favorable environment for equities.