Since the Federal Reserve made a significant 50 basis point rate cut last month, employment and economic data have surprisingly shown an upward trend. In addition, the latest release of the September meeting minutes has not only completely dashed hopes in the market for another substantial rate cut, but also has led to speculation on whether the Fed will hit the “pause” button at the next meeting.

Therefore, the CPI inflation data to be released at 20:30 tonight (Thursday) Beijing time has also become particularly important, with investors eagerly awaiting the results. This may become another important variable that stirs up the US stock market and interest rate cut expectations, prompting the Federal Reserve to change course and pause the rate cuts.

CME's Federal Reserve observation tool shows that the market currently expects a high probability (82.9%) of another 25 basis point rate cut at the November meeting, with a 17.1% probability of hitting the 'pause button'.

Jeremy Goff, Managing Director of Palmer Square Capital Management, said, "Thursday's CPI will be an important data point. If the CPI is too high, or hotter than expected, the Federal Reserve will need to do some work to ensure we land correctly."

BeiChen Lin, Investment Strategist at Russell Investments, commented that an unexpected upward trend in inflation data may reignite discussions about a pause in the Fed's rate cut cycle, although the possibility of a 25 basis point cut in November remains high.

Analysts led by Ohsung Kwon at UBS Group believe that the unusually strong employment report last week has put more pressure on tonight's upcoming CPI data. If the data unexpectedly shows a significant increase, it is now more likely to trigger a wave of market volatility.

"The CPI data scheduled to be released on Thursday is no longer an 'irrelevant event'. Following the surge in the employment report last Friday, we believe the importance of this week's CPI has increased. A fairly significant surprise could bring uncertainty to the easing cycle and create more market volatility." They wrote in a report.

UBS Group economist Brian Rose said: "September's CPI will be a key data point. If the rate of price increase is faster than expected, combined with strong labor data, the possibility that the Fed will stand pat at the November meeting will increase."

Ryan Sweet, Chief US Economist at Oxford Economics, has also changed his stance. He stated that the minutes of the meeting increased the risk that the rate cut in 2025 may be lower than he expected. He had originally expected the Fed to cut rates by 25 basis points at the last two meetings of this year, followed by four more 25-basis-point cuts next year.

However, following the release of the September 'divergent version' meeting minutes by the Fed, Sweet stated in a recent report that by 2025, "the Fed may pause actions for a longer period to assess the impact of the early rate cuts in this normalization cycle."

How do analysts view US inflation?

Overall, analysts generally believe that the continuous decline in energy prices in September will drive the overall inflation to continue its slowdown.

Analysts at Morgan Stanley predict that the overall CPI growth rate in September will decrease to 0.09%. However, looking at the core CPI data, the trend of inflation in goods and services presents a mixed picture, with the September core CPI expected to increase by 0.26%, slightly higher than the market's general prediction of 0.20%.

Goldman Sachs believes that due to the rising prices of used cars and airfares, goods inflation is expected to rise somewhat, but service inflation is expected to continue to slow down, mainly benefiting from the decline in housing inflation.

However, future data may be influenced by oil prices: due to intensified conflicts in the Middle East and two massive hurricanes hitting the southeastern United States, oil prices surged in October.

"We have many unpredictable things happening," Goff said, "These aftershocks often impact economic data over time."

Data is key.

Overall, despite recent remarks from several Federal Reserve officials supporting further rate cuts, they still emphasize that it depends on the data. Atlanta Federal Reserve Bank President Bostic stated on Tuesday that he remains "highly concerned" about inflation, including bringing the inflation rate down to the central bank's 2% target, while minimizing damage to the labor market as much as possible.

Boston Federal Reserve Bank President Collins stated that sticky inflation remains a risk to the economy, but the possibility of an economic downturn also exists. Federal Reserve Board member Kugler stated that she supports further rate cuts by the Federal Reserve, but inflation and employment are key factors driving the pace of rate cuts.

Dallas Federal Reserve President Logan stated on Wednesday that further easing of the financial environment may stimulate spending and drive demand beyond supply, indicating the risk that the Federal Reserve should not rush to lower the federal funds target rate to a "normal" or "neutral" level.

Logan stated that the Federal Reserve "should proceed with rate cuts gradually while monitoring financial conditions, consumption, wages, and price trends." The difficulty in determining the neutral rate is another reason Logan advocates for gradual rate cuts. The neutral rate refers to a level of interest rates that neither stimulate nor hinder economic growth.

Virtus Investment Partners Chief Economist Seamus Smyth stated: "I think it's too early to talk about the Fed pausing rate hikes now unless there is some bad news about inflation. We're not there yet." While he believes the possibility of a 50 basis point cut can be ruled out, he still expects rate cuts of 25 basis points in the November and December meetings, respectively.

Editor/new