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Fed Inflation Gauge Slowed Again in October, Supporting Dovish Powell

Further slowing in the Fed's preferred inflation gauge is adding heft to Chairman Jerome Powell's signals of smaller rate hikes.

The Federal Reserve's preferred measure of U.S. inflation slowed again in October, data published Thursday indicated, adding further support to Chairman Jerome Powell's indication of smaller near-term rate hikes following his closely-watched speech yesterday in Washington.

The September core PCE Price Index rose 5% from last year, down from the 5.1% pace recorded in September and essentially matching the consensus Street forecast of 5%. The core index was up 0.2% on the month, the Bureau of Economic Analysis reported, a big decline from September that came in inside analysts' forecasts.

The headline PCE index rose 0.3% on the month and eased to 6% on the year, with both readings falling below analysts forecasts. Personal incomes rose by 0.7% while real personal spending rose by 0.8%, the BEA noted, matching the Street consensus forecast of a 0.8% advance.

Powell told the Brookings Institution Wednesday that the path ahead for inflation is "highly uncertain", even following what he called the "welcome surprise" of a slower-than-expected October CPI reading.

"There is considerable uncertainty about what rate will be sufficient, although there is no doubt that we have made substantial progress," Powell said of the Fed's cumulative 3.75% rate increases this year. "and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down."

U.S. stocks turned higher in pre-market trading following the data release, with futures tied to the Dow Jones Industrial Average indicating a 70 point opening bell gain and those linked to the S&P 500 showing an 18 point advance.

Benchmark 10-year U.S. Treasury bond yields fell 7 basis points to 3.58% following the data release, while 2-year notes were pegged at 4.314%.

The CME Group's FedWatch tool is now showing a 77% chance of a 50 basis point rate hike from the Fed later this month in Washington, with the bulk of bets pointing to a Fed Funds rate of between 5% and 5.25% in early spring.