The US Federal Reserve will likely stay on course towards delivering another interest rate cut in its December policy meeting even after the latest inflation print revealed that consumer prices rose for the first time in seven months. Wall Street analysts say that October's inflation data "will change little for the US Fed'' when the Federal Open Market Committee (FOMC) will meet for the last monetary policy meeting of 2024 in December.
US inflation ticked higher in October 2024 amid higher costs for shelter after having slowed in September to their lowest pace since 2021, which led Wall Street to lower its bets for the US Federal Reserve's definite interest rate cuts in 2025. The data underscored the ongoing risks Fed policymakers face, trying to bring price pressures fully under control in the world's largest economy.
However, the report from Bureau of Labor Statistics released on Wednesday, November 13, which also showed underlying inflation continuing to run a little warmer in October, did not change expectations that the US Fed would deliver a third rate cut in December against the backdrop of a softening labor market.
US consumer price index (CPI) rose 2.6 per cent from a year earlier, up from 2.4 per cent in September, marking the first rise in annual inflation in seven months or the first acceleration on an annual basis since March. The US CPI rose 0.2 per cent for the fourth straight month in October when compared to September. Shelter accounted for over half of the overall monthly advance.
According to FX Market Analyst Kyle Chapman, at the Ballinger Group, the US consumer price index (CPI) based inflation matched expectations for an uptick to 2.6 per cent in October, while core inflation held steady at 3.3 per cent. Core inflation rose 0.28 per cent on a month-on-month basis.
“Monthly core inflation continues to trend well above two per cent, and that stickiness will make it difficult for the Fed to continue cutting on a back-to-back basis. We haven’t seen any real disinflationary progress since the mid-summer,” said Chapman.
That said, it is once again shelter-driven, which the US Fed has flagged it’s not too concerned about, given the softer leading indicators and its high CPI weighting. The distribution of price rises also bodes well for a softer PCE print, as it is primarily the components that are lower PCE weighted that have been hotter in the CPI report.
“The relatively drastic movements in yields are unjustified as this report matters little for the Fed rate path, although it suggests that the many in the market were positioned for a higher number. The details look reasonable enough for continued easing in the near term, but we have a lot of data to come before December, and into next year it is likely to be fiscal policy that comes to dominate the outlook,” concluded Chapman.
Though the US central bank is expected to lower rates again in December, economists see the scope for more cuts next year as limited. US Treasury yields have surged as investors expect the president-elect's policies will proceed unhindered, with Republicans controlling the US Senate and on the verge of clinching the House of Representatives.
Most of the September-to-October increase in consumer prices reflected a rise in rents and housing costs, a trend that Fed officials expect to fade in the coming months. The US economy is growing faster than expected. It has expanded at nearly a three per cent annual rate over the past six months, with consumers, particularly those with higher incomes, spending freely and fueling growth.
“If Trump imposes a 60 per cent tariff on Chinese imports and 10 to 20 per cent tariff on imports from other countries, that would trigger inflation and jeopardise the Fed’s policy of containing inflation, necessitating a rethink of the Fed’s present policy of rate cut. This has the potential to negatively impact global stock markets,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
The latest inflation numbers, along with strong consumer spending and economic growth, will keep US Fed officials cautious as they debate how quickly to reduce borrowing costs in the months to come. While the labor market is cooling, a retreat in inflation has been key to policymakers’ rationale for cutting interest rates.
Also Read: US Fed rate cut outlook: Can Donald Trump’s return shape the US central bank’s interest rate path?
At a news conference last week, US Fed Chairman Jerome Powell expressed confidence that inflation is still heading down to the central bank’s two per cent target, though perhaps slowly and unevenly. Powell also noted that most sources of price pressures are cooling, suggesting that inflation isn’t likely to accelerate in the coming months.
Policymakers also pay close attention to wage growth, as it can help inform expectations for consumer spending — the main engine of the economy. Wages are still growing and have outpaced prices for the past year and a half. But Powell noted that wages aren’t rising quickly enough to boost inflation.
In its seventh policy meeting for 2024, the US Fed slashed its benchmark interest rate by (25 bps) a quarter of a percentage point to 4.50-4.75 per cent. US Fed chair Jerome Powell-led rate-setting panel cut the federal funds rate for the second straight meeting in November after reducing the policy rate in September 2024 for the first time in four years on cooling price pressures.
The US central bank's rate decision should help ease the costs of mortgages and other loans -- welcome news for consumers, who had widely cited the cost of living as a top concern ahead of Tuesday's vote.
But the cost of borrowing will also depend on how financial markets think a Trump victory will impact the economy over the longer term and where the Fed's interest rates will need to settle to ensure inflation remains now.
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