Households Keep Inflation in Check: Expectations Stay Anchored

• NY Fed one-year inflation expectations were 3.2%.

• The three- and five-year expectations held steady at 3%.

• The numbers remain in line with their historical averages.

It feels like an eternity since the Federal Reserve held its last monetary policy meeting. Believe it or not, it was just six weeks ago that policymakers lowered interest rates by 25 basis points for the second time this year. Yet, given the long gap between meetings, media reports have been filled with speculation about the next move our central bank may or may not take.

Much of the focus has been on whether policymakers will place more weight on slowing employment gains or on the pace of inflation growth. Fed officials like Kansas City President Jeffrey Schmid and St. Louis President Alberto Musalem have warned that easing further could push inflation farther from the 2% target. Meanwhile, others, including Board Members Christopher Waller and Michelle Bowman, have argued that failing to support the weak job market now could lead to more drastic steps later.

Last week, payroll processor ADP’s November hiring total showed the labor market continues to struggle…

Yesterday, we received a key inflation number that should support further easing. Based on November data from the New York Fed, inflation expectations for both short- and long-term horizons haven’t budged. In fact, they remain consistent with the survey’s historical averages. That’s important for policymakers because they want to ensure households don’t start buying goods in anticipation of even higher prices—a dynamic that can trigger an inflation spiral.

If household expectations stay anchored, as the recent data suggests, the Fed should have plenty of room to keep lowering interest rates next year. If Chair Powell strikes a dovish tone when policymakers meet again this week, it could underpin a steady, long-term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

On Monday, the New York Fed released its Survey of Consumer Expectations for November. It summarizes economic information gathered from 1,300 households about their outlook on inflation, household finances, and the labor and housing markets. The survey constantly rotates respondents in and out of the sample to keep results fresh.

The survey was designed to help central bank policymakers understand individuals’ expectations and behaviors. These readings matter because they indicate whether households believe inflation will keep rising or return to normal. Based on the latest result, consumers’ near-term expectations haven’t changed much…

As you can see, inflation expectations for 12 months out held steady at 3.2%. The gauge has averaged just over 3.3% based on New York Fed records going back to the middle of 2013. After holding steady around 3% in the years leading up to the pandemic, households’ near-term price outlook jumped in 2021 and 2022 as prices surged. Then, as COVID stimulus abated, expectations leveled off around 3% again in 2024. And after a couple of bumps earlier this year, the gauge appears to be settling once more.

It’s a similar story for the longer-term outlook. Consumers don’t expect price growth to change. The three-year inflation expectation held steady at 3% in November, in-line with the New York Fed’s historical average…

If we move out to five years, we can see that inflation expectations were the same last month as October and September, holding at 3%. That’s inline with the longer-term average, based on data going back to early 2022…

As I noted at the start, our central bank is closely watching these numbers to gauge its support for the economy. It doesn’t want long-term inflation expectations to surge again as they did in 2021. So far, we have experienced some hiccups, but we aren’t seeing a repeat episode, according to NY Fed data.

Based on the most recent Personal Consumption Expenditures data for September, annualized price growth of 2.8% is still above the Fed’s 2% target. Yet, it’s holding steady. And if the Cleveland Fed’s expectation for o.2% growth in October is correct, the annualized pace could cool to 2.7%.

So, we’ll want to keep a close eye on the NY Fed’s household expectations data. Because based on what I’m seeing, the Fed should have room to keep supporting economic growth. If Powell signals the Fed is increasingly comfortable with the inflation outlook moving forward, it should underpin a steady rally in the S&P 500.

Five Stories Moving the Market:

Japanese Finance Minister Satsuki Katayama said she is closely watching market trends, as the yield on 10-year government debt hovers near 2%, a level not seen since 2006; she said the government will monitor market trends closely and will manage government bonds appropriately – Bloomberg. (Why you should care – the government has expressed concern about the stress placed on households by rising borrowing costs)

Bond investors are positioning for a shallow easing cycle from the Federal Reserve as it gears up for its final policy meeting of 2025; many Wall Street banks have penciled in fewer Fed interest rate cuts in 2026 on lingering inflation concerns and expectations of a more resilient U.S. economy – Reuters. (Why you should care – the expectation shift should boost demand for shorter duration Treasurys)

U.S. President Donald Trump granted Nvidia permission to ship its H200 artificial intelligence chip to China in exchange for a 25% surcharge; the move represents a victory for Nvidia in its push to get Trump and Congress to relax export controls that have kept the company from selling its AI chips to the world’s largest semiconductor arena - Bloomberg. (Why you should care – the move should boost the demand backlog and revenue outlook for Nvidia)

U.S. President Donald Trump called a fine imposed on Elon Musk's social media company X by European Union tech regulators "a nasty one" and said he did not understand how they could justify the move; X was fined 120 million euros ($140 million) by EU tech regulators last week for breaching online content rules – Reuters. (Why you should care – the fine could risk restoking trade tensions between the two blocs)

Institutional investment in the commercial real estate sector has begun to rebound, but the big players are far more selective than before the pandemic; investors are steering their capital toward only the strongest markets and properties to tenants with the best credit ratings – WSJ. (Why you should care – investors are focusing more attention on stronger suburban markets)

Economic Calendar:

Earnings: AZO, CPB

Reserve Bank of Australia Monetary Policy Announcement

Japan – Machine Tool Orders for November

Germany – Exports, Imports for October (2:00 a.m.)

U.S. – NFIB Small Business optimism for November (6:00 a.m.)

U.S. – ADP Employment Change Weekly (8:15 a.m.)

U.S. – JOLTS job openings for September (10:00 a.m.)

Treasury Auctions $75 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $39 Billion in 10-Year Notes (1 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)