US inflation has proven to be in line with predictions. The result indicates that inflation is decreasing remarkably slowly. This result does not lend support to the idea that the Federal Reserve would hold on its decision to lower rates in December. The yields of 2-year United States Securities decreased, but the 10-year quickly began to recover losses and ultimately turned out to be higher at the end of the day. The dollar gained, which brought the rate of the major currency pair to the lowest level in over a year. The market slightly changed its valuation regarding the December FOMC decision – it increased the chances for a decrease by 25 bp.
Consumer prices in the US grew by 0.2% in October compared to the previous month. The annual rate increased from 2.4% to 2.6%. The more pertinent core rate, which excludes fluctuating energy and food prices, was 0.3% month to month. The year-on-year figure remained at 3.3%. These figures coincided with predictions but nonetheless caused market volatility.
The figures do not show progress in the ongoing process of disinflation. They are not catastrophic either. The market had already known that an inflation hike was highly probable. Therefore, we cannot declare an end to the decreases, and the current data should be interpreted only as an adjustment. Readouts for November and December will therefore be crucial. If the Fed lowers rates by a quarter percentage point, monetary policy will still be restrictive and in the worst case scenario we will see a continued break in cuts. Everything points to the CPI measure consistently remaining above the central bank’s target and the “home stretch” leading towards it will be protracted and will require patience. This process could extend over time, especially now that we know that Trump’s new economic policy will start being implemented next year.
Although inflation is definitely no longer at an alarmingly high level, it has not shown signs of decreasing over the past few months. This especially applies to the core index. Over the last six months, it has stayed within a narrow range between 3.2% and 3.4%. For the Fed, this means that the momentum of the “core” CPI index remains too high. Another interest rate decrease at the FOMC’s December meeting appears likely, as the Fed will want to avoid threats to full employment goal. However, supporters of a more cautious approach to rate cuts will likely gain backing. The risk is increasing that the institution will take a “pause” at its first meeting in 2025. By then, we will have a fuller picture of the economy and inflationary processes. It is still too early for a final judgement.
Author: Łukasz Zembik, Oanda TMS Brokers
Source: https://ceo.com.pl/usa-inflacja-zgodna-z-prognozami-rynek-oczekuje-ruchu-fed-w-grudniu-95334
