Dive Brief:

• Consumer sentiment hit a six-month high this month, buoyed by lower borrowing costs and expectations of stable inflation, according to a University of Michigan survey released Friday.
• Consumers anticipate 2.7% inflation in 12 months, unchanged from September and within the 2.3% to 3% range during the two years before the pandemic, Joanne Hsu, director of the university’s consumer survey, said in a statement. Long-run inflation expectations eased to 3% from 3.1% in September.
• Politics is influencing the economic outlook of U.S. households, according to Hsu. The Nov. 5 “election looms large over consumer expectations,” she said. While sentiment fell 1% among Democrats, it rose 8% among Republicans, highlighting confidence their candidate will prevail, she said.

Dive Insight:

The Federal Reserve, after months of falling price pressures, cut the main interest rate in mid-September by a half percentage point to a range between 4.75% to 5%.

Since then, consumer spending, the labor market and the broader economy have shown signs of unexpected strength.

The Atlanta Fed on Friday said the economy began the fourth quarter on solid ground, estimating that gross domestic product likely expanded at a 3.3% annual rate during last quarter. GDP grew at annual rates of 1.4% in the first quarter and 3% in the second quarter, according to the Bureau of Economic Analysis.

U.S. jobless claims fell by 15,000 to 227,000 during the week ended Oct. 19, the Labor Department said Thursday, releasing data that was brighter than forecast.

Retail sales rose a higher-than-expected 0.4% in September after a 0.1% gain in August, the Commerce Department said last week, highlighting the strength of the consumer and bolstering recent upgrades in forecasts for 2024 economic growth.

Also, unexpectedly strong hiring by U.S. employers last month dashed expectations of a second consecutive half-point reduction in the federal funds rate at the end of a two-day meeting of Fed policymakers on Nov. 7.

Traders in interest-rate futures have cut the odds of a half-point cut from 57% a month ago to zero, according to the CME FedWatch Tool. They see 96% odds of a quarter point reduction, a slower pace of easing than forecast by Fed officials on Sept. 18.

Central bank officials in recent weeks have affirmed that the Fed will likely continue to trim borrowing costs, while cautioning against expectations of outsized cuts.

“Although we have begun the policy recalibration process, we are not saying mission accomplished when it comes to inflation,” Cleveland Fed President Beth Hammack said Thursday at an conference on inflation at the district bank.

“The pandemic and its aftermath have been a reminder that differing movements across the components of inflation can have important implications for the path of aggregate inflation,” she said in a webcast recording by Bloomberg News. “Declines in energy prices have lowered headline inflation of late, but geopolitical events could cause these prices to rapidly reverse course.”