Today's US CPI numbers removes (almost) the Fed's remaining rate hike optionality

By Stuart Cole | @Stuart Cole | 14 November 2023

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The October US inflation report showed pricing pressures continuing to slow across the economy, with falls seen in both the headline and core numbers. On a monthly basis, the headline rate showed no upwards momentum at all, printing at 0.0% as lower petrol prices more than compensated for any upwards pressure seen elsewhere, such as food prices which showed a modest 0.3% gain. The core measure slowed to 0.2% from 0.3%, suggesting an annualised rate of under 2.5% and very close to the Fed’s 2% target.

Overall it is a good report and raises questions of quite what Kashkari and Powell were seeing last week for them to continue to warn that further interest rate rises could yet be seen. It will probably now take exceedingly strong November reports for both CPI and the payrolls numbers for the FOMC to deliver another rate rise in December. However, the Fed will not want to step back from its hawkish stance yet; the annual core rate at 4% is still some way away from target and Powell and his colleagues have made clear on more than one occasion that they need to see a sustained run of softening inflation numbers before they can be certain that CPI is unquestionably moving back to target. Given how wrong they got the 'transitory' inflation argument, they would much prefer to over-tighten than risk starting to ease too soon. Any lingering concerns the Fed may have will also be exacerbated by the reaction of the market to today’s figures, which has seen yields fall and which will unwind some of the tightening delivered to date. But on the back of these numbers, the prospects of such a December hike being delivered look to have now all but disappeared.

A first cut is now seen by the market as being delivered by June, with just under 100bps of overall cuts priced in by end-2024. Given how ultra-sensitive the Fed is to making sure CPI does not get out of control again, we may yet hear further warnings that it is still too early to be bringing the tightening cycle to an end. The problem now is that much of the market will no longer believe them.

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Given how ultra-sensitive the Fed is to making sure CPI does not get out of control again, we may yet hear further warnings that it is still too early to be bringing the tightening cycle to an end. The problem now is that much of the market will no longer believe them.