Just tonight, the Fed's last interest rate decision of the year hits: stubborn core inflation and an unexpected pullback in the unemployment rate, the market focuses on the "dot plot" and SEP for clues to cut interest rates
Reporter: Cai Ding Editor: Lan Suying
At 2 a.m. Beijing time on Thursday (December 14), the Federal Open Market Committee (FOMC) of the Federal Reserve will announce its last interest rate decision of the year, and the Fed is widely expected to continue to "hold its ground".
On the evening of the 12th, the US CPI data for November was released. Despite a slight rebound in core CPI month-on-month growth in November, stubborn services inflation, and an unexpected slide in the November non-farm unemployment rate to 3.7% released last week, the consensus is that this will not shake the Fed's decision to keep interest rates unchanged for the third time in a row. In addition, the futures market is betting that the Fed will start cutting interest rates as early as May next year, and the cumulative rate cuts for the year will reach 125 basis points.
For now, the focus is on the "dot plot" and "Summary of Economic Projections" (SEP) that will be published in conjunction with the policy statement, which will provide a clearer view of the Fed's path of interest rate cuts next year.
However, Jonathan Millar, senior U.S. economist at Barclays, said in an email to the Daily Economic News, "We expect the SEP release on Thursday to show a median core PCE forecast of 2.5% in 2024, however, we have no interest in whether the core PCE will fall to 2.5% next year" Or even less skeptical, the Fed will keep interest rates at their current elevations for most of next year, and will not officially start the rate cut cycle until the end of next year, i.e., by only 25 basis points by the end of next year. ”
Core inflation remains stubborn
On the evening of the 12th, Beijing time, the data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose by 3.1% year-on-year in November, slowing down from the 3.2% increase in October, in line with expectations, however, the month-on-month growth rate of CPI in November rose to 0.1%, higher than the previous value and the expected 0%.
Core inflation, which the Fed is more concerned about, rose 4% year-on-year in November, in line with the previous reading and expectations, and double the Fed's 2% target level. The core CPI growth rate rebounded to 0.3% from 0.2% in November, in line with expectations.
US CPI slowed in November, but core CPI recorded a rebound month-on-month (Credit: CNBC)
In summary, the CPI in the United States in November still showed a trend of "falling energy prices and higher service prices". Among them, gasoline prices fell by 5% and 6% month-on-month respectively in the past two months, and fuel prices fell by 2.7% month-on-month in November and 24.8% year-on-year. However, price increases in services, including housing, transportation services, and health care services, widened from the previous month. In addition, used car prices, which had fallen for five consecutive months, also rebounded in November.
Olu Sonola, head of U.S. economics at Fitch Ratings, said in an email to the Daily Business News that "the November inflation data, while not having a big impact on the Fed's decision to keep interest rates unchanged, provides some reason for the Fed's argument that it is still too early to cut rates in March 2024." In addition, the Fed is still far from its goal of sustained downward core services inflation. That said, while the overall trend in inflation is encouraging, the details can raise some doubts in the market. ”
The reporter of "Daily Economic News" noticed that in fact, in addition to the rebound in core inflation, the new non-farm payrolls data in November also showed the stubbornness of inflation. Data released by the U.S. Bureau of Labor Statistics on Friday showed that U.S. nonfarm payrolls rose by 199,000 in November, higher than the consensus estimate of 185,000 and well above the previous reading of 150,000. The U.S. unemployment rate unexpectedly fell to 3.7% in November, beating expectations of 3.9% and also down from 3.9% in October (note: according to the "Phelps curve" theory, when the unemployment rate falls, it often means that inflation is rising). In the month, the labor force participation rate rose further to 62.8%, up from expectations and 62.7% in September.
However, this has not dampened market expectations for a rate cut by the Fed. Over the weekend, Goldman Sachs brought forward its expectations for a Fed rate cut from the fourth quarter of 2024 to the third quarter, citing cooling inflation. According to Goldman Sachs' forecast released on December 10, the federal funds rate will fall to 4.875% by the end of 2024, down from the bank's previous forecast of 5.13%.
U.S. one-year inflation expectations fell to 3.4% in November (Image: Bloomberg)
However, it should be noted that while core inflation has picked up, short-term inflation expectations have fallen: data released by the New York Fed on Monday showed that US consumers' inflation expectations for the year ahead were 3.4% in November, the lowest since April 2021. Median expectations for inflation in the year ahead fell for the second month in a row, with expectations for three- and five-year inflation levels holding steady at 3% and 2.7%, respectively. The pullback in short-term inflation expectations reflects a range of factors, including a pullback in expected increases in gasoline prices and a drop in expected increases in rent and college tuition prices to their lowest level since January 2021.
Industry experts: The market is too optimistic about interest rate cuts, and it may not start until the end of next year
The Washington Post reported that overall, inflation in the United States has fallen much faster than most people expected so far this year, which also confirms the expectation that the Federal Reserve will continue to "hold its ground" this week.
A year after prices soared to a 40-year high, inflation for all goods and services in the United States has now fallen sharply. While the real prices of eggs, bread, rent, and other essential household items in the United States are still higher than they were a few years ago, the costs are not increasing faster than expected, bringing stability and predictability to countless household budgets and the U.S. economy as a whole.
From aggressive interest rate hikes since March last year to a slowdown in the pace of tightening at the end of this summer, it can be seen that the Fed is becoming more cautious about overtightening monetary policy. The big question facing the market right now is whether the Fed's aggressive tightening cycle is really over and whether the Fed will cut interest rates next year. Markets are hungry for hints, which may get some hints from Powell's press conference in the early hours of Thursday morning.
Typically, the Fed cuts interest rates to help the economy get out of a recession. However, Goldman Sachs pointed out in a recent research report that as the U.S. economy is less likely to fall into a recession in the near term, officials may cut interest rates because inflation is approaching the Fed's 2% target. Fed Governor Waller has recently expressed a similar view in public.
According to CME Group's FedWatch tool, after the release of November inflation data, futures contracts linked to the Fed's policy rate quickly brought forward the Fed's first rate cut to March 2024, but then bets on a rate cut in March have decreased, and as of press time, the futures market believes that the first rate cut will not be until May next year.
Image source: CME Group
Specifically, the futures market believes that the Fed will cut interest rates by 25 basis points five times next year, with a cumulative rate cut of 125 basis points. By the end of next year, the federal funds rate is expected to be reduced to a level of 4%~4.25%.
However, according to Jonathan Millar, a former economist at the Federal Reserve's Department of Research and Statistics and now senior U.S. economist at Barclays, the market's current expectations are too optimistic. In an email to the reporter of the "Daily Economic News", he pointed out that although the "dot plot" given by the FOMC in September this year shows that it will raise interest rates again before the end of the year, in view of the recent public remarks of FOMC officials, the bank expects the FOMC to keep interest rates unchanged for the third time in a row.
Millar believes that the data in Q4 so far still looks very resilient, and the recent series of inflation data is still far from confirming a downtrend amid a tight labor market, the bank believes that the FOMC will maintain its tightening bias in the upcoming policy statement, and remains open to further rate hikes if the degree of inflation decline in the coming months is disappointing.
The main attention of the market will be focused on the update of the "dot plot". "After the market priced in interest rate cut expectations last month, the current financial environment constraints have been greatly reduced, and demand fundamentals look more supportive than they were in September. As a result, we expect the 'dot plot' to be released on Thursday to dash the market's hopes of a big rate cut by the FOMC next year." Millar said.
He further explained: "We expect the SEP release on Thursday to show a median core PCE forecast for 2024 to fall to 2.5%, however, we are skeptical that core PCE will fall to 2.5% or lower next year, with the Fed keeping rates at current highs for most of next year and not officially starting the rate cut cycle until the end of next year, i.e. only 25 basis points by the end of next year." ”
National Business Daily