Level 1 — Absolute Beginner
A new report says prices are rising more slowly than experts thought. This is good news for people who worry about high prices.
The report measures inflation. The number is 3.4 percent for all goods. For core prices, it is 3.0 percent.
The Federal Reserve is the bank that sets US interest rates. Some people thought it would raise rates in October. Now fewer people think so.
Two days ago, about 70 out of 100 traders expected a rate rise. Now it is less than half. Stock prices went up a little.
- report
- A written or spoken account of facts.
- price
- The money you pay for something.
- inflation
- A general rise in prices over time.
- core
- The most basic part. Core prices leave out food and fuel.
- interest rate
- The cost of borrowing money.
- trader
- A person who buys and sells stocks or other assets.
- expect
- To think something will happen.
- stock
- A small piece of a company that you can buy.
Level 2 — Elementary
The Federal Reserve's favourite inflation gauge came in cooler than economists expected on Wednesday. The personal consumption expenditures index, known as PCE, rose 3.4 percent from a year earlier in August, below forecasts. Core PCE, which leaves out food and fuel, stayed at 3.0 percent.
The report changed what traders think the Fed will do. Two days ago, they saw about a 70 percent chance of an interest rate hike at the central bank's meeting on October 28. After the data, that chance fell to roughly 47 percent, close to a coin toss.
Government bond yields also eased. The yield on the 30 year Treasury had touched its highest level since 2002 the day before. It fell back to about 5.55 percent as investors bought bonds again.
Stocks rose a little. The S&P 500 gained about 0.3 percent and the Nasdaq about 0.5 percent, while the Dow held steady. Worries remain, though. The war in Iran is now in its seventh month, and it keeps pushing up energy prices.
- gauge
- A tool or number used to measure something.
- economist
- An expert who studies money and business.
- forecast
- A guess about the future based on facts.
- central bank
- A national bank that controls money and interest rates.
- yield
- The money an investor earns from a bond each year.
- investor
- A person who puts money into something to earn more.
- ease
- To become less strong or serious.
- energy
- Fuel and power, such as oil and gas.
Level 3 — Intermediate
The Federal Reserve's preferred inflation gauge came in softer than economists had forecast, and it changed the mood in markets almost at once. The personal consumption expenditures price index rose 3.4 percent in August from a year earlier, below expectations, while the core measure, which strips out volatile food and energy costs, held at 3.0 percent.
The reaction was most visible in the pricing of policy. According to CME FedWatch, the odds of a rate increase at the central bank's October 28 meeting dropped to about 47 percent, from around 70 percent only two days before. Interest rate swaps showed a similar retreat, with traders pricing roughly a one in three chance of a hike.
Bond markets exhaled as well. The 30 year Treasury yield had reached its highest level since 2002 in the previous session, a milestone that was weighing on stocks. It slipped back toward 5.55 percent as buyers returned. Equities turned higher, with the S&P 500 up about 0.3 percent and the Nasdaq up about 0.5 percent, while the Dow was little changed.
Still, analysts warn that one soft reading does not settle the argument. Inflation remains well above the Fed's comfort zone, oil prices are volatile because the war in Iran has entered its seventh month, and long term borrowing costs are elevated. Chipmaker Micron was due to report earnings the same day, giving investors another test of demand for memory chips.
- preferred
- Liked better than the alternatives.
- volatile
- Changing quickly and unpredictably.
- swap
- A contract in which two sides exchange financial payments.
- retreat
- A move backward or a reduction.
- milestone
- An important point or achievement along the way.
- equities
- Another word for shares of stock.
- elevated
- Higher than normal.
- demand
- The desire of buyers to purchase a product.
Level 4 — Advanced
The Federal Reserve's favoured inflation gauge undershot forecasts on Wednesday, and markets promptly recalibrated their view of what the central bank will do next. The personal consumption expenditures price index rose 3.4 percent in August from a year earlier, beneath expectations, while the core measure, which excludes food and energy, held at 3.0 percent.
The clearest fallout was in the pricing of monetary policy. CME FedWatch put the probability of a rate increase at the October 28 meeting at roughly 47 percent, down from about 70 percent just two days earlier, and interest rate swaps implied something closer to one in three. For a Fed that has spent months wrestling with an energy shock, that is a meaningful shift in tone even if it is far from a reprieve.
Sovereign debt breathed a sigh of relief as well. The 30 year Treasury yield had touched its highest level since 2002 in the previous session, a level that was acting as an undertow on equities. It retreated toward 5.55 percent as buyers stepped back in, and stocks turned higher: the S&P 500 gained about 0.3 percent, the Nasdaq about 0.5 percent, and the Dow was broadly flat.
Sceptics caution against reading too much into a single print. Inflation is still well above the Fed's target, crude remains hostage to the war in Iran, now in its seventh month, and the term premium embedded in long dated bonds shows no sign of vanishing. Micron's earnings, due the same day, offered a fresh gauge of whether the artificial intelligence build out is still absorbing memory chips at a punishing pace.
- recalibrate
- To adjust something again to make it more accurate.
- fallout
- The consequences of an event.
- reprieve
- A temporary escape from something unpleasant.
- sovereign debt
- Bonds and loans issued by a national government.
- undertow
- A hidden force pulling in a different direction from the surface.
- print
- In markets, a single published data reading.
- term premium
- Extra return investors demand for holding long term bonds.
- absorb
- To take in or soak up something, such as supply.
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