The U.S. Consumer Price Index (CPI) rose 2.4% year-on-year in September, higher than market expectations, indicating that the recent progress in easing price pressures has paused, but the market is still betting that the Federal Reserve will cut interest rates by one basis point in November. However, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said he may be inclined to pause the rate cut at the November meeting.
Data released by the U.S. Department of Labor on the 10th showed that the monthly growth rate of the Consumer Price Index (CPI) in September was 0.2%, the same as in August, higher than the market expectation of 0.1%. The annual growth rate of CPI dropped from 2.5% in August to 2.4%. Although the increase was the lowest since February 2021, it was still higher than the market expectation of 2.3%.
Excluding volatile food and energy prices, the core CPI rose 0.3% in September, the same as in August, but higher than the market forecast of 0.2%. The annual growth rate of the core CPI in September rose from 3.2% to 3.3%, higher than the market expectation of 3.2%.
The core CPI increased by 0.3% for the second consecutive month, breaking the previous downward trend. The three-month monthly growth rate of the core CPI increased by 3.1% on an annualized basis, the highest level since May.
A pause in rate cuts in November?
Bloomberg reported that the higher-than-expected inflation data, coupled with strong U.S. non-farm payrolls last week, may intensify the market debate over whether the Federal Reserve will cut interest rates sharply in September, cut rates slightly next month, or pause rate cuts. Officials plan to cut interest rates by another 2 basis points before the end of this year, and many officials said they are closely watching changes in the labor market.
Olu Sonola, head of U.S. economic research at Fitch Ratings, said inflation is cooling but has not yet subsided. With September employment data expected to be strong, the newly released CPI data encourages the Federal Reserve to remain cautious. It may still cut interest rates by 1 basis point in November, but there is no guarantee that it will cut interest rates in December.
According to the latest data from the CME Fed Watch tool, the market currently believes that the probability of maintaining the current interest rate unchanged in November is 15.6%, and the probability of a 1 basis point rate cut is 84.4%.
Fed officials' views
Although three Federal Reserve officials, including John Williams, President of the Federal Reserve Bank of New York, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, and Thomas Barkin, President of the Federal Reserve Bank of Richmond, disagreed with the higher-than-expected September inflation data on Thursday, they hinted that the Federal Reserve could continue to cut interest rates.
However, a fourth official hinted that he might be inclined to pause rate cuts at the next meeting. Atlanta Fed President Raphael Bostic said that he expected another 1 basis point rate cut this year at the September meeting, and the Fed has two more rate-setting meetings this year, and he fully agrees not to take action at one of them if the data indicates it is appropriate:
To me, the volatility in the data could mean that we should perhaps pause in November, and I'm absolutely open to that, and I think we can afford to be patient and let things drag on for a while, and I think there are some things in this CPI report that support that view.
BlackRock: A quick rate cut is unlikely
BlackRock strategists said in a report that as the economic growth outlook remains stable, the Federal Reserve is less likely to cut interest rates quickly. It is expected that by early 2025, the Federal Reserve will have room to cut interest rates to 3.5% or slightly higher. The minutes of the Federal Reserve's September meeting showed that interest rates will be cut gradually. Therefore, monetary policy is expected to move towards normalization rather than towards monetary easing.