Fed Rate Cut Odds Increase as Inflation Rises: What It Means for Your Investments
In a recent government report, inflation saw a modest rise in August, leading traders to slightly increase their bets on the Federal Reserve implementing another 50-basis-point rate cut in November. This move is seen as a way for the central bank to prioritize the labor market amidst economic uncertainties.
Currently, interest rate futures are indicating a 54% chance of a half-point cut in November, compared to a 46% chance of a smaller quarter-point reduction. Traders are anticipating a total decline of 75 basis points by the end of the year from the current policy rate of 4.75%-5.00%.
Strategists at Citi are also predicting a 50-basis-point rate cut in November, emphasizing that the final decision will heavily rely on upcoming data, particularly the next monthly jobs report. While jobless claims are currently low, attention is now turning towards the employment components of PMI data.
Fed Chair Jerome Powell has indicated that the initial rate cut was a signal of the Fed's readiness to take decisive action if the labor market weakens further. Citi strategists believe that if the unemployment rate stabilizes, the Fed may slow the pace of rate cuts to 25 basis points per meeting. However, they also suggest that upcoming economic data may push the Fed to maintain a quicker pace of rate cuts.
Although Fed officials have been encouraged by stable jobless claims, Citi points out signs of potential further increases in unemployment, such as a slowing hiring rate and softer private payroll growth. With two more jobs reports scheduled before the November FOMC meeting, the Fed will have more data to evaluate the labor market trend.
In terms of inflation, the PCE price index rose 0.1% in August, bringing the annual inflation rate to 2.2%. Core PCE, excluding food and energy, also saw a 0.1% rise for the month, with a 2.7% year-over-year increase. Fed officials often prioritize core PCE as a long-term inflation indicator.
In summary, the increased odds of a Fed rate cut in November signal a cautious approach to economic uncertainties. Investors should closely monitor upcoming data releases, particularly the monthly jobs report, to assess the impact on financial markets and adjust their investment strategies accordingly.