PCE inflation a key litmus test for early rate cut bets

If the 12-month core PCE inflation print in the US aligns with estimates, it would mark the slowest pace of annual core price growth since April 2021.
While the current backdrop does not signify "mission accomplished" in terms of addressing inflation, policymakers must now focus on planning for the next phase of the economic battle. This involves being ready to resume interest rate hikes if inflation persists. Simultaneously, they need to strategize for potential rate cuts if the mandate asymmetry shifts, indicating greater risks to the labour market than to inflation.
Despite seeming improbable in late November 2023, with core inflation remaining 1.5 percentage points above the target and a supported job market, the suggestion that the Fed might be compelled to implement significant rate cuts in just 13 months is not entirely implausible. Considering the current downward inflationary pressures, a 100-basis-point reduction in interest rates next year would only bring rates down to 4.5%.