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The Personal Consumption Expenditures (PCE) price index — the Fed’s preferred inflation measuring tool — rose 0.4% in September and 3.4% year-over-year. Core PCE came in line with economic forecasts, cooling to 3.7%.DoubleLine Deputy Chief Investment Officer Jeffrey Sherman sits down with Yahoo Finance Live to talk about what the new inflation print could mean for the Fed’s interest rate strategy ahead of its November FOMC meeting.”When I look at the report, too, on PCE, there’s a little disconcerting behavior in here,” Sherman says, adding: “When you continue to look at this all year, we’ve seen an increase in spending that outstrips the increase in earnings on the income side. This just means there’s effectively a drawn savings out there. And I know this has been something that the Fed has focused on, a lot of Wall Street has focused on, is this concept of excess savings in the marketplace.”Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.Video TranscriptDIANE KING HALL: What kind of messaging are you looking for from the Fed when it meets next week? What are you bracing for? What are you preparing for?JEFFREY SHERMAN: Yeah, Diane. Well, I think really the thing to look at is to kind of get what the signal is for the forward-looking policy. And the bond market really doesn’t have another hike priced in. I know in the last statement of economic projections that we got back in September that there was this dot plot that said on average or at least more Fed-governors expect another rate hike than don’t. But I think now that we’re seeing this kind of trend in inflation, I think the right messaging is to pause at this stage.We know that interest rates take a while to get into the broad-based economy. And I really feel like we’re just finally starting to see some of the impact of these tighter policies. And so when I look at the report too on PCE, there’s a little disconcerting behavior in here. If you continue to look at this all year, we’re seeing an increase in spending that outstrips the increase in earnings on the income side. So this just means that there’s effectively a draw on savings out there.Story continuesAnd I know this has been something that the Fed has focused on, a lot of Wall Street is focused on is this concept of excess savings in the marketplace. And so it seems that the consumer, although spending and looks very healthy, it’s done so at an income growth rate that’s not keeping pace with that consumption. And so, again, I think this is consistent with commodity prices being up. When you ask the average person in the US what’s the inflation measure, they judge it by two things, their grocery bill or their dining bill, the food consumption, and how much it costs to fill their tank at the pump.And so I think that some of that increased spending we’re seeing is coming on that side right now. And I know there’s a lot of uncertainty about the geopolitical risk out there and what this ultimately means for the energy markets. And so I think the Fed needs to be patient. The Fed hiking rates can’t curtail price movements and the small wiggles and jiggles we get inside of the oil prices out there, but I think if they look at the overall economy, I think it is indeed kind of slowing down to some of the metrics that they’re looking for.And effectively, I think that that is right for them to be able to continue to have this pause behavior. So we at DoubleLine really think that the Fed is close to the end of the hiking cycle. And really, if they hike one more time or not, the market is even less than a coin flip at this point. And it says not the meeting next week nor at the meeting in December at this point in time. And so I think the data corroborates that the Fed should continue to hold. And I think that the policy is tight and we just need to wait for these effects to really slow down pieces of the economy.
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