Title: Federal Reserve Rate Cut Odds Increase on Modest Inflation Rise: What It Means for Investors
Investing.com -- Traders are now leaning towards a 50-basis-point rate cut by the Federal Reserve in November following a slight uptick in inflation in August. This shift in sentiment comes as the central bank places greater emphasis on the labor market in its decision-making process.
Interest rate futures currently indicate a 54% probability of a half-point reduction next month, up from 46% for a smaller quarter-point cut. Overall, traders are pricing in a total decrease of 75 basis points by the end of the year, from the current policy rate of 4.75%-5.00%.
Experts at Citi are also forecasting a 50-basis-point cut in November, contingent on upcoming economic data, particularly the next monthly jobs report. While jobless claims remain relatively low, focus is now turning to the employment components of PMI data.
Federal Reserve Chair Jerome Powell has signaled the central bank's readiness to act decisively if the labor market weakens further, indicating a potential slowdown in rate cuts if unemployment stabilizes. However, Citi analysts believe that upcoming economic indicators may prompt the Fed to maintain a more aggressive pace of reductions.
Despite positive signs such as stable jobless claims, Citi points to slowing hiring rates and softer private payroll growth as possible precursors to rising unemployment levels. With two more jobs reports on the horizon before the November FOMC meeting, Fed officials will have additional data to evaluate the labor market's trajectory.
Inflation, as measured by the PCE price index, saw a modest 0.1% increase in August, bringing the annual rate to 2.2%. This marks a decrease from July's 2.5% and is the lowest level since February 2021. Core PCE, excluding food and energy, also rose by 0.1% for the month, with a 2.7% year-over-year increase.
Economists had anticipated these figures, with core PCE serving as a key indicator for long-term inflation trends. The slight uptick in core inflation from the previous month suggests a nuanced picture of the economy's price dynamics.
In conclusion, the Federal Reserve's potential rate cuts in response to evolving economic conditions could have significant implications for investors. As the central bank navigates a delicate balance between supporting growth and managing inflation, market participants should closely monitor upcoming data releases and Fed communications to gauge the trajectory of monetary policy.
