Inflation data falling short of expectations in the United States has weakened the likelihood of an interest rate hike by the Federal Reserve in October. In light of recent figures and comments from New York Fed President John Williams, Goldman Sachs now considers an October rate increase unlikely. The bank has postponed its forecast for a second rate hike to December, while also acknowledging a high likelihood that the Fed may decide that additional hikes are unnecessary.
Inflation Deceleration Alters Rate Hike Expectations
Goldman Sachs economists Jan Hatzius, David Mericle, and Alec Phillips noted in their research report that, given the latest inflation data, they anticipate the core Personal Consumption Expenditures (PCE) price index to rise to 3% by the fourth quarter. This projection is notably below the Federal Open Market Committee’s (FOMC) median estimate of 3.4%.
Bank of Montreal analysts pointed out that the U.S. Bureau of Economic Analysis’ (BEA) annual data revisions indicated a larger-than-expected downward adjustment in the Fed’s preferred inflation gauge. In August, the annual increase in the core PCE slowed to 3%, beneath the market’s 3.3% expectation and the Fed’s 3.2% forecast.
According to analysts, continued economic growth, stable private sector employment, and a downward revision in inflation have somewhat diminished the urgency for another rate hike in October. Nevertheless, inflation remains conspicuously above the Fed’s 2% target.
Accompanying this shift in rate expectations is a significant development in the bond market. U.S. 10-year Treasury yields climbed to 5.29%, reaching their highest level since 2007.
Household Savings Rate Declines
Household data revealed a widening gap between income and expenditures. Personal incomes in the U.S. increased by 0.2% in August compared to the previous month, while personal consumption expenditures rose by 0.9%, indicating that spending growth outstripped income increases.
Peter Schiff highlighted the personal savings rate’s drop to 4.1% in August, marking its lowest point since November 2022. Schiff argued that the reduction in savings, coupled with spending rising faster than income, could benefit Democrats in the November midterm elections, predicting a victory for them.
Recent data indicates that the deceleration in inflation is dampening expectations for new rate hikes. Conversely, the surge in bond yields and the decline in household savings rates are emerging as other notable aspects of the economic landscape.
In terms of Bitcoin, a reduced probability of an October rate hike and potential redundancy of additional increases could provide a supportive backdrop. However, the increase in U.S. bond yields to 5.29% might drive investors toward interest-bearing assets, maintaining pressure on Bitcoin. Therefore, the extent to which easing rate expectations influence Bitcoin should be monitored alongside bond market movements.
