Expert Commentary

Fed's Measure of Negative Price Deflation Edges Up

How long before the market sniffs a rate hike?

Yesterday’s release of the Core Personal Consumption Expenditures Price Index (PCE) in the U.S. for August showed a year-on-year rate of change at 1.6%. That was higher than the 1.4% forecast by economists and is significant because Core PCE is the Federal Reserve’s preferred measurement of consumer price inflation. Based on this evidence of higher price inflation (or perhaps we should call it negative price deflation to be consistent with central bank speak) one might think that expectations of the Fed keeping interest rates unchanged for the next three years might start to change.

However, central bank interest rate policy changes always follow what the free-market prices in beforehand and, judging by yesterday’s evidence, the market is in no rush to re-evaluate Fed policy. Both 3-month Eurodollar futures and the 2-year Treasury yield were unchanged as the snooze-fest in the front end of the yield curve continues.

Keep an eye on Core PCE by all means, but don’t expect the Fed to do anything on rates until well after short-end market interest rates have moved significantly higher.


U.S. Core PCE