According to a note from UBS on the Federal Open Market Committee (FOMC), the recent increase in US inflation has caused a stir in the markets regarding the likelihood of a Fed rate cut. The Core CPI rose to 0.3% m/m for the second consecutive month, surpassing expectations and pushing the y/y rate to 3.3%. This, along with strong job numbers, has led traders to lower the odds of a significant easing. The CME FedWatch now indicates no chance of a 50bp cut, down from 35% last week, with a 15% chance of no cut, up from zero.
Despite these shifts, UBS analysts advise not to dismiss the possibility of future rate cuts. They point out that overall inflation trends are still on a downward trajectory, despite fluctuations in monthly data. Headline CPI has dropped to 2.4%, the lowest since 2021, while shelter costs have also moderated. It is worth noting that August’s CPI numbers were disappointing before PCE showed softer figures.
When it comes to the Federal Reserve, UBS suggests that officials are not overly concerned with individual data points. NY Fed’s Williams, along with Chicago’s Goolsbee and Richmond’s Barkin, have all noted the consistent decline in inflation. FOMC minutes indicate that policymakers are considering a move towards a neutral stance over time, provided that the data supports it. They view the current policy as restrictive and acknowledge the importance of eventually normalizing it.
In conclusion, while the timing of a rate cut may be uncertain, the bias towards easing remains unchanged. Market watchers are advised to pay close attention to the upcoming PCE data to either confirm or challenge the recent CPI surprise. The next PCE report, including data for September 2024, is set to be released on October 31, 2024. Stay tuned for further updates on how this could impact future Fed decisions.
