After the U.S. CPI data is released this Wednesday, the Federal Reserve's rate cut of 25 basis points in December is basically a done deal. Currently, the market probability of the Federal Reserve cutting rates in December, as traded in federal funds futures, has basically reached 100%.
Why is the market so certain? Because according to the Federal Reserve's public goals, the purpose of raising and lowering interest rates and the extent of it is to achieve two objectives: full employment and controlling inflation. On the employment side, the official non-farm payroll data for the U.S. in November was quite good, exceeding expectations, with the monthly data being the highest since March this year. However, the unemployment rate has still risen, from 4.1% to 4.2%. Moreover, household survey data calculated per head is much worse than the enterprise survey data calculated by job postings. Therefore, for the goal of full employment, if the Federal Reserve does not want the unemployment rate to rise rapidly, it is necessary to continue cutting rates preemptively. Generally speaking, if it reaches 4.5%, it basically means a recession. Thus, a cut of 25 basis points is appropriate since the data isn't particularly bad.
Everyone can see that the decision-making logic is still relatively simple and clear. The transparency of the U.S. government politically lies here, as you can guess, just like I can. But don't forget, the Federal Reserve still needs to control inflation. If inflation is too high, it won't be able to lower interest rates and may even need to raise them. This Wednesday, the inflation data results were perfect CPI data, with both CPI and core CPI just meeting expectations, neither too high nor too low.
So unless something unexpected happens, it is basically set in stone that the Federal Reserve will cut rates by 25 basis points next Wednesday. By the way, the future path of the Federal Reserve's rate cuts will still depend on the employment and inflation data after Trump's administration, especially inflation. We can see that the inflation data for November, although still acceptable, is indeed beginning to trend upward year-on-year. Additionally, why do people say that the Biden-Harris administration is stepping down because of inflation? We can see that since Biden took office, core CPI has not had a single month of negative growth month-over-month. In fact, the growth of inflation during his tenure has been higher than the growth of American incomes. During Biden's four years in office, the real income of Americans, which is income after accounting for inflation, has overall decreased by 3.3%, and has only grown by 2% since the COVID-19 pandemic. So how can people say he won't step down?
The Bank of Japan is likely to maintain interest rates next week, as decision-makers prefer to spend more time examining overseas risks and clues about wage growth next year. Any similar decision will increase the likelihood of a rate hike at the Bank of Japan's meetings in January or March next year, at which point more information about wage growth next year will be available.
Insiders also said that there is no consensus within the Bank of Japan on the final decision, and some members of the committee still believe that Japan has met the conditions for a rate hike in December. This decision will depend on each member's judgment regarding the likelihood of Japan achieving sustained price increases driven by wages. If upcoming events, such as the Federal Reserve's meeting next week, trigger another plunge in the yen, exacerbating inflationary pressures, the Bank of Japan may also favor a rate hike. However, overall, many policymakers at the Bank of Japan seem in no rush to pull the trigger.
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