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Inflation increased slightly in November, but this did not reduce market expectations federal Reserve Interest rates will be cut in the policy makers’ meeting next week.
consumer price Index (CPI) rose last month, rising to 2.7% on an annual basis from 2.6% in October. The increase was in line with estimates from economists surveyed by LSEG, but it puts the headline inflation figure ahead of the Fed’s 2% target rate – though it remains well below this inflation cycle’s 9.1% peak in June 2022 , which was the highest in four decades.
Despite the rise in inflation, the probability of a 25 basis point rate cut at next week’s meeting rose from 88.9% on Tuesday to 94.7% as of Wednesday afternoon, according to the CME FedWatch tool.
“The increase in inflation rates (2.7% vs 2.6%) will not be enough to spoil Christmas – the Fed is going to cut rates by 25 bps next week and that should enable markets to rally towards the end of the year, ” said Chris Zaccarelli, chief investment officer of Northlight Asset Management.
Inflation rose 2.7% in November, in line with expectations
The market expects the Fed to cut interest rates next week. (Mandel Ngan/AFP/via Getty Images)
“Headline CPI was consistently above 3% at the beginning of the year and now it is consistently below 3%, so despite the fact that the series is a little noisy month-to-month, we believe the Fed will continue to see is likely to get through these ups and downs and continue on its easy path,” Zaccarelli said.
The Fed started the current rate-cutting cycle with a higher rate than usual 50 basis point cut In September, when the benchmark federal funds rate ranged from 5.25% to 5.5%, the highest level since 2001.
The central bank took another step after this 25 basis point cut In November, inflation remained relatively stable amid signs that inflation was still running in line with expectations and that the labor market had cooled.
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EY Chief Economist Gregory Daco and EY Senior Economist Lydia Bausor said they expect the latest inflation data will allow the Fed to continue cutting rates, although they think it will be too early for policymakers to compare the current signal by the market. Must have been a close call.
“We believe the economic fundamentals of gradually slowing labor market momentum, strong productivity growth and disinflationary under-current will support a 25 bps Fed funds rate cut at the upcoming FOMC meeting,” Decco and Boussore wrote. ”
“Nevertheless, current market pricing of a greater than 99% probability of a 25 bps rate cut misaligns with Powell’s agnostic optionality approach… given recent Fed communications and policymakers’ excessive data reliance “The likelihood of a rate cut should be very close to a coin toss,” he added.
US economy added 227 thousand jobs more than expected in November
Federal Reserve Chairman Jerome Powell The central bank is taking a gradual approach to lowering interest rates and could adjust the pace of its cuts as needed depending on economic conditions, it said at a news conference after the Fed’s November rate cut.
“As the economy develops, monetary policy will adjust to best promote our maximum employment and price stability goals. If the economy remains strong and inflation is not moving steadily toward 2%, we will return to policy accommodative “If the labor market weakens unexpectedly, or inflation falls more rapidly than anticipated, we could move more quickly,” Powell explained.
Federal Reserve Chairman Jerome Powell and Fed policymakers are scheduled to meet next week on rate cuts. (Alex Wong/Getty Images)
Powell spoke at an event hosted by the Dallas Regional Chamber in mid-November and gave more details about the Fed’s approach to the rate cut decision.
“The economy is not sending any signals that we need to rush to lower rates. The strength we are currently seeing in the economy gives us the ability to make our decisions carefully,” Powell said. “Ultimately, the path of the policy rate will depend on how incoming data and the economic outlook evolves.”
“We’re navigating the middle… the risk that we move too fast, the risk that we move too slow. We want to go in the middle and get it right so we are providing support to the labor market and also helping to enable inflation should go down,” Powell said. “So moving a little slower, if the data will let us go a little slower, seems like a smart thing to do.”
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The Federal Open Market Committee (FOMC), the Fed’s monetary policy-making panel, is set to announce its decision about a rate cut on Wednesday, December 18, after a two-day meeting.
