Wall Street Expects Fed Rate Cut Next Week

Advertisements

Despite a slowdown in the progress of declining inflation as indicated by the US Consumer Price Index (CPI) in November, the market anticipates that the Federal Reserve (Fed) will proceed with its planned interest rate cuts during the upcoming Federal Open Market Committee (FOMC) meetingThis expectation is not based solely on the most recent inflation figures; rather, it reflects the broader economic landscape and its trajectory.

The comparative analyses of the economic conditions from July 2023 to September 2024 reveal a stark contrast to the current stateThe Fed previously raised interest rates to a stable range of 5.25% to 5.50%, aiming to combat inflationary pressures that had seen peaks significantly beyond target levelsNow, although inflation has yet to meet the Fed’s 2% target, it has notably decreased from its previous highs, and there are signs that the jobs market is stabilizing

This stability in employment encourages Fed officials to consider further rate cuts as a means of normalizing policy to prevent potential economic stagnation or adverse impacts on job growth.

Analysts have noted a crucial point: following the anticipated rate cut, the Fed may issue guidance that seems cautious regarding subsequent cutsThey may indicate a pause in rate reductions early next year and potentially contract the number of cuts projected for 2025. This foresight exhibits a careful approach taken by the Fed, mindful of the current economic context and future implications.

For instance, data released by the Bureau of Labor Statistics reflects a 0.3% increase in the November CPI, a jump higher than the 0.2% recorded in October, marking the most significant increase since April of the same yearHowever, the year-over-year growth stands at 2.7%, aligning with expectations

Notably, core inflation, which excludes food and energy prices, remained stable with a 0.3% month-over-month rise, consistent with increases observed since AugustThis stability forms a backdrop for the Fed's decision-making process.

Tuan Nguyen, an economist from RSM US, emphasizes that the current economic situation strongly bolsters the case for the Fed maintaining its course for a December rate cutHe points to seasonal factors that historically influence inflation metrics, suggesting that as these seasonal disruptions dissipate over the next few months, inflation data will better capture the true state of the economyThus, executing a rate cut in December appears not only reasonable but fitting with the current economic climate.

Furthermore, there is optimism regarding a renewal of downward inflation trendsAlthough there was a noticeable rise in prices for used cars and hotel accommodations in November, available industry data does not support the sustainability of such price increases

Housing inflation has positive indications as well; rental and owner-equivalent rent prices saw just a 0.2% increase for November, establishing a low point in the current cycle, which bodes well for the overall inflation moderation.

Neil Dutta, the Director of Economic Research at RenMac, asserts that normalizing housing rent inflation is crucial for allowing overall inflation to align with the Fed’s 2% targetAmong various factors that impact inflation, the rental segment consistently shows significant discrepancies with Fed goalsData reveal a 0.3% month-over-month increase in overall housing inflation for November, yet it remains an area of focus for future economic health.

In recent dialogues, many Fed officials have highlighted substantial progress in combating inflation and acknowledged that the labor market is gradually returning to a balanced state after previous overheating

alefox

Mary Daly, the President of the San Francisco Fed, outlined last week that significant shifts in inflation require a departure from the aggressive tightening policies of the past two yearsWith the current inflation situation showing notable stabilization around the target, Daly emphasized that monetary policy should adapt to these new realities.

Moreover, Fed Governor Christopher Waller also expressed a strong preference for further interest rate reductions in the upcoming December FOMC meetingDespite recent upticks in inflation sparking concerns about prices remaining elevated above the Fed's 2% target, Waller showcased a composed reaction, indicating that he intends to avoid overreacting to transitory spikes while carefully considering a variety of factors in shaping the future course of monetary policy.

As the intricacies of economic indicators unfold, it is evident that the Fed's approach will hinge greatly on both quantitative data and qualitative assessments from ongoing dialogues within the economic community

  • 4 Comments
Leave a comment