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Inflation rose slightly in November, but that hasn't dampened market expectations that the Federal Reserve will cut interest rates at its policymakers meeting next week.
The Consumer Price Index (CPI) rose last month, rising at an annual rate of 2.7% from 2.6% in October. The increase was in line with expectations of economists surveyed by LSEG, but moved headline inflation further away from the Fed's 2% target rate, but still well above this inflation cycle's peak of 9.1% in June 2022. It went below. The highest amount in the past 40 years.
Despite rising inflation, the probability of a 25 basis point rate cut at next week's meeting rose to 94.7% as of Wednesday afternoon from 88.9% on Tuesday, according to the CME FedWatch tool.
Chris Zaccarelli: “Rising inflation (2.7% vs. 2.6%) is not enough to ruin Christmas. The Fed is set to cut rates another 25bps next week, which should help markets recover towards the end of the year. Deaf,” he said. Chief Investment Officer of Northlight Asset Management.
Inflation rose 2.7% in November, as expected
The market expects the Fed to cut interest rates next week. (Mandel Gunn/via AFP/Getty Images)
“The headline CPI was consistently above 3% at the beginning of the year and is now consistently below 3%, so although there is some noise from month to month, the Fed is likely to “We think the economy will overcome these fluctuations and continue on an easing path,” Zaccarelli added.
The Fed began its current rate-cutting cycle in September with a larger-than-usual 50 basis point cut, when the benchmark federal funds rate ranged from 5.25% to 5.5%, its highest level since 2001. .
The central bank followed this up with another 25 basis points cut in interest rates in November, with inflation still in line with expectations and signs that the labor market is relatively stable despite cooling. .
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EY Chief Economist Gregory Daco and EY Senior Economist Lydia Boussour expect the latest inflation data to allow the Fed to continue lowering rates, but that policymakers will be more likely to continue lowering rates than the market currently indicates. He said that he believes that the request should be made more closely to those who are involved.
“We believe economic fundamentals – a modest slowdown in labor market momentum, strong productivity growth, and an undercurrent of disinflation – support a further 25 bps cut in the federal funds rate at the next FOMC meeting,” Daco and Boussall wrote. ”
“Yet, the current market pricing in a >99% probability of a 25bps rate cut does not seem consistent with Chairman Powell's agnostic options approach… Recent Fed communications and policymakers' extremes “Given the current data dependence, the probability of a rate cut should be much closer to a coin toss,” they added.
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In a press conference after the Fed's rate cut in November, Fed Chairman Jerome Powell said the Fed is taking a gradual approach to lowering rates and can adjust the pace of rate cuts as needed based on economic conditions.
“As the economy develops, monetary policy will be adjusted to best promote the goals of maximum employment and price stability. If we don't, we can reduce policy restraint more slowly. If markets weaken unexpectedly or inflation falls faster than expected, we can act more quickly.” did.
Federal Reserve Chairman Jerome Powell and Fed policymakers are scheduled to meet next week to discuss rate cuts. (Alex Wong/Getty Images)
Powell spoke at an event hosted by the Dallas Regional Chamber in mid-November and further elaborated on the Fed's approach to its decision to cut interest rates.
“The economy is not sending a signal that we need to rush into cutting rates. The strength of the economy we're seeing right now allows us to approach this decision with care,” Powell said. “Ultimately, the fate of policy rates will depend on future data and how the economic outlook develops.”
“We are moving between…the risk of moving too fast and the risk of moving too slow. We want to aim for the middle ground and get it right. So we… “It's providing support to the labor market, and it's also helping to enable a labor market that's going to bring down inflation,” Powell said. “So if the data allows us to go a little slower, that seems like a smart move.”
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The Federal Reserve's monetary policy-making committee, the Federal Open Market Committee (FOMC), is scheduled to announce its decision on a rate cut on Wednesday, Dec. 18, after two days of meetings.
