The broadly cooling U.S. CPI report for June heightened expectations that the Federal Reserve will cut interest rates before the end of the year, possibly before the November election.
The surge in such bets has contributed to a recent fall in the dollar and a surge in several market sectors including bonds, small-cap stocks and home builders.
Gavekal Research, a global research institution, pointed out that compared with the end of last year, the current inflation data is more conducive to rate cuts. As of December last year, the three-month annualized CPI was lower than the Fed's 2% target after adjustment. In addition, the core CPI, which excludes the more volatile food and energy prices, was also lower than the target value. The three-month core CPI annualized growth rate was 1.8% after adjustment.
Gavekal Research noted that if inflation continues to remain low and the Fed is confident that it can keep it that way, the policy rate will likely be lowered before the end of 2024, possibly before the election.
"Ideally, Fed Chair Powell might prefer not to change rates before the election, but that view could be overturned by the data," the strategists said in a note.
The research firm reviewed historical precedents for the Federal Reserve changing interest rates in the months leading up to a presidential election.
Since 1974, the Fed has changed interest rates eight times in the 10 months before 13 presidential elections and kept them unchanged five times.
This history suggests the Fed will not shy away from making policy adjustments around election time if economic indicators warrant it.
While markets react to the latest inflation data and its implications, the Federal Reserve, under Powell's leadership, remains committed to relying on economic data for policy responses.
As a result, strategists at Gavekal Research concluded that if the current downward trend in inflation persists, a rate adjustment is likely before the November election.
The Federal Reserve will enter a pre-meeting blackout period on Saturday, before which policymakers led by Powell will make important comments this week to assess the slowdown in inflation and consider whether to signal the start of interest rate cuts.
With inflation creeping toward its 2% target and concerns growing about how long the job market can remain strong, the Fed is likely to use these final days to signal that a rate cut is imminent or to explain why recent data still don’t support a shift to easier monetary policy.
Powell will first talk with David Rubenstein, co-executive chairman of the Carlyle Group, at 0:00 a.m. the next day. As for other Fed officials, Waller's speech at the Kansas City Fed event may be particularly noteworthy. He has been an important voice in the inflation debate and is considered a hawk, but he recently pointed out through his own research that the job market is at a stage where further weakness could lead to an acceleration in unemployment.
“We expect a strong signal in July that the Fed will begin cutting rates at its upcoming meeting, perhaps as early as September if economic developments develop as expected,” Citigroup analysts wrote on Friday.
Currently, data from CME Group's FedWatch shows that weak inflation in June prompted investors to push the probability of a rate cut in September to more than 90%. In addition, some major banks and investment institutions have brought forward their expectations for rate cuts.
Article forwarded from: Jinshi Data