Sonali Basak, chief investment strategist at iCapital, joins Making Money to discuss the Federal Reserve’s holding of interest rates, two dissenting votes from the FOMC, and whether the economy will continue to grow at a healthy pace.
The Federal Reserve’s preferred choice inflation gauge fell further short of the central bank’s target in September as consumers face price pressures.
The Commerce Department reported Thursday that the personal consumption expenditure (PCE) The index rose 0.5% on a monthly basis in September and 3.6% from a year ago. These two figures are in line with the expectations of economists surveyed by LSEG.
Core PCE, which excludes volatile measures of food and energy prices, rose 0.3% on a monthly basis and 3.1% year-over-year. These figures were both in line with economists’ expectations.
FEDERAL RESERVE MAKES DECISION ON INTEREST RATES BEFORE MIDTERMS
Federal Reserve Policymakers are focusing on the headline PCE figure as they try to bring inflation back to their long-term goal of 2%, although they view the core data as a better indicator of inflation.
Compared to the August figures, headline PCE increased from 3.4% to 3.6%, while core PCE increased from 3% to 3.1%.
Prices of goods increased by 3.9% year-on-year, while prices of services increased by 3.5% compared to last year in September.
The personal savings rate as a percentage of personal disposable income was 3.8%, down from 4% in August. Over the past two years, the savings rate has declined from a peak of 6.2% in April 2025 to 5.6% in January 2026.
PCE inflation rose in line with expectations in September. (Will Newton/Getty Images)
As inflation moved away from the Fed’s 2% target, the Commerce Department also released the preliminary estimate of third-quarter gross domestic product (GDP), which rose more than expected.
The Bureau of Economic Analysis estimated third-quarter GDP at 3.4%, above the 3.2% estimate of economists surveyed by LSEG. The BEA will release two subsequent revisions of third-quarter GDP data.
WHITE HOUSE ECONOMIC CHIEF REVEALS WHY AMERICANS DON’T FEEL OPTIMISTIC ABOUT THE ECONOMY
What the experts say
Bret Kenwell, US investment analyst at etoro, said that “today’s online PCE report offers few surprises. But the absence of a shock does not mean the absence of a problem: headline PCE and core PCE both reached their highest levels since May, underscoring that inflation remains a stubborn problem.
“The bright spot was the third quarter GDP report, which showed annualized growth of 3.4% and was slightly above expectations. Personal consumption led the way, while federal government consumption reached its highest level in at least five years,” Kenwell explained. “The report confirms that demand remains resilient, although it does little to alleviate the inflationary pressure linked to this demand.”
Federal Reserve Chairman Kevin Warsh and central bank policymakers left interest rates unchanged at their October meeting. (Daniel Heuer/Bloomberg via Getty Images)
James McCann, senior economist for investment strategy at Edward Jones, said that “the seemingly indefatigable US consumer and the burgeoning AI investment boom continue to drive the US economy, with growth well above trend.”
“Certainly, there are some headwinds that should cool activity rates a bit towards the end of the year with rising oil prices and tightening financial conditions. However, the economy appears to be in good shape, which may have investors wondering again why the Fed didn’t raise rates yesterday, especially with PCE still exceeding the Fed’s September target of 3.6%,” McCann explained.
He added that while “Chairman Warsh was reluctant to provide strong signals at yesterday’s FOMC meeting, a bullish tone on growth, dissent in favor of a hike, and the message that financial conditions were not strained all point to a return to tightening in December and potentially another interest rate hike in 2027, in our view.”
CONSUMER INFLATION INCREASED FASTER THAN EXPECTED IN SEPTEMBER, CPI REPORT SHOWS
What does this mean for the Fed and interest rates?
The market continues to expect the Fed to raise interest rates by 25 basis points in December, which would bring the federal funds rate back to a range of 4% to 4.25% once implemented.
The CME FedWatch tool shows a 79.6% probability that the Fed will raise rates by 25 basis points in December, down slightly from yesterday’s 84.2%, but higher than the 73.3% probability a week ago.
What does this mean for the market?
The benchmark S&P 500 index fell more than 0.4% after the market opened Thursday morning.
The Dow Jones Industrial Average fell more than 0.3%, while the Nasdaq Composite slipped more than 1.4%.
CLICK HERE TO DOWNLOAD THE FOX NEWS APP
Gn bussni
