A new reading of the Federal Reserve’s preferred inflation gauge could make it easier for the central bank to justify a dovish shift in 2024, setting the stage for rate cuts in the new year.

The "core" Personal Consumption Expenditures index — which excludes volatile food and energy prices — clocked in at 3.2% for the month of November.

That bested economists’ estimate of 3.3%, and showed that inflation is expanding more slowly than it did earlier in the year.

Another encouraging sign is that core inflation dropped to 1.9% on a six-month annualized basis, which is below the Fed’s target of 2%. That is the first time in three years that the six-month measure fell below the Fed’s 2% goal.

"It is clear that price pressures are abating and the Fed should cut rates accordingly," Luke Tilley, chief economist for Wilmington Trust, said.

The new print released Friday backs up a view expressed last week by Fed Chair Jerome Powell, who signaled the central bank had likely reached the peak on rate hikes and would turn attention to rate cuts looking ahead. The Fed last raised rates in July, to a 22-year high.

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

The comments sparked a market rally, as investors cheered the end of the most aggressive campaign to cool inflation since the 1980s.

Markets boosted bets on the number of cuts by the Fed next year and predicted there is now a better than 70% chance the Fed will begin loosening in March. Fed officials at their last meeting penciled in a median of three rate cuts for next year without saying when they could begin.

But several Fed officials used media interviews over the past week to throw cold water on whether cuts would actually happen or how quickly.

Chicago Fed President Austan Goolsbee said in an interview that the Fed had not pre-committed to cutting interest rates soon or swiftly, while New York Fed President John Williams said in a separate interview that it was "premature" to talk about a rate cut in March.

Cleveland Fed President Loretta Mester told the Financial Times that markets had gotten "a little bit ahead" of the central bank.

But San Francisco Fed President Mary Daly was more willing this week to acknowledge that cuts are on the table if inflation keeps tumbling. She told the Wall Street Journal that it was appropriate to begin the rate-cut discussion given the progress on inflation.

Richmond Fed President Tom Barkin told Yahoo Finance in an interview this week he needed to see more conviction and consistency that inflation is coming back to the Fed’s 2% target, noting that the data has been jumping around.

Barkin noted he wants to see the services component of inflation — like the prices of haircuts, for example — follow the same downward path already taken by goods like washing machines and cars. Services still rose 4.1% last month, while prices for goods decreased 0.3%.

"If you're going to assume that inflation comes down nicely, then of course, we'd respond appropriately," Barkin said.

Capital Economics economist Andrew Hunter said in a Friday note that the pushback from Fed officials "isn’t fooling anyone."

"There is mounting evidence that the post-pandemic inflation scare is over and we expect interest rates to be cut significantly next year," he added in his note.

There was other evidence this week that inflation is moving closer to where the Fed wants it. The Commerce Department also revised core PCE lower for the third quarter, hitting the Fed’s actual target of 2%.

Meanwhile, incomes grew 0.4%, a slightly faster clip from 0.3% in October, suggesting the economy can avoid a recession.

Quincy Krosby, chief global strategist for LPL Financial, said the data on personal spending and durable goods suggests a "resilient economic landscape" — giving reasons for the Fed to still be cautious.

"With prices still rising at an annual 3.2% in November, the Fed will be alert to any suggestion that a more confident consumer coupled with corporations seemingly prepared to spend more on capital equipment, could push prices higher," Krosby said in a Friday note.

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