The U.S. Bureau of Labor Statistics released data on October 10, showing that the monthly increase in the Consumer Price Index (CPI) in September was 0.2%, the same as in August, higher than the market expectation of 0.1%. The year-on-year CPI growth rate fell from 2.5% in August to 2.4%, the lowest since February 2021, but still higher than the market expectation of 2.3%.
Excluding the volatile food and energy prices, the core CPI rose 0.3% in September, the same as in August, but higher than the market estimate of a 0.2% increase. The year-on-year core CPI rose from 3.2% to 3.3%, higher than the market expectation of 3.2%.
The core CPI has risen 0.3% for the second consecutive month, breaking the previous downward trend. The annualized three-month increase in the core CPI rose to 3.1%, the highest level since May.
Pause rate cut in November?
According to a Bloomberg report, the higher-than-expected inflation data, combined with the strong U.S. non-farm payrolls report last week data, may intensify market debate over whether the Federal Reserve will make a significant rate cut in September and a modest cut or pause in the following month. Officials plan to cut rates by another 2 percentage points by the end of this year, and many officials say they are closely monitoring changes in the labor market.
Olu Sonola, head of U.S. economic research at Fitch Ratings, said inflation is cooling but not yet subsiding, and with the strong September employment data as expected, the new CPI data encourages the Fed to remain cautious. He said the Fed may still cut rates by 1 percentage point in November, but cannot guarantee a cut in December.
According to the latest data from the CME Group's Fed Watch tool, the market currently sees a 15.6% probability of the Fed keeping the current rate unchanged in November, and an 84.4% probability of a 1 percentage point rate cut.
Views of Fed officials
Although three Fed officials, including New York Fed President John Williams, Chicago Fed President Austan Goolsbee, and Richmond Fed President Thomas Barkin, suggested on Thursday that the Fed can continue to cut rates despite the higher-than-expected September inflation data.
However, a fourth official hinted that he may be inclined to pause rate cuts at the next meeting. Atlanta Fed President Raphael Bostic said that he expected another 1 percentage point rate cut this year, but with two more policy meetings left, he is completely open to not taking action at one of those meetings if the data indicates it is appropriate:
In my view, the volatility in the data may mean that we should pause action in November, and I'm absolutely open to that. I think we have the capacity to be patient and let things play out a bit longer, and I think some of the content in this CPI report reinforces that view.
BlackRock: Unlikely to cut rates quickly
In a report, BlackRock strategists said that with the economic growth outlook remaining stable, the likelihood of the Fed cutting rates quickly is relatively small. They expect the Fed to have room to lower rates to around 3.5% or slightly higher by early 2025. The minutes of the Fed's September meeting indicated that it will gradually cut rates, so monetary policy is expected to move towards normalization rather than easing.
