Source: Jin10 Data

The Federal Reserve may not have received the inflation data it wanted on Thursday, but some economists believe that the latest inflation data, which is most favored by the Federal Reserve, may lead it to continue cutting interest rates by 25 basis points at its policy meeting next week.

Quincy Krosby, Chief Global Strategist at LPL Financial, stated that she still expects the Federal Reserve to announce a small rate cut on November 7, while emphasizing that the mixed feelings about the inflation data released on Thursday indicate that "the Fed's path to curb inflation and declare victory could still be bumpy."

Other economists who also predict a small rate cut by the Federal Reserve in November admit that there may be a debate among decision-makers on whether to pause the rate cuts in November. An observer of the Federal Reserve stated that ultimately it will be up to Federal Reserve Chairman Powell to maintain the consensus on rate cuts. Gregory Daco, Chief Economist at EY, said:

"We expect Powell to once again be the rational voice, guiding the Federal Open Market Committee to cautiously ease monetary policy next week."

The latest Personal Consumption Expenditures (PCE) Price Index shows a year-on-year growth of 2.1% in September, down from 2.3% in August, almost close to the Federal Reserve's 2% target.

However, the Federal Reserve tends to focus on the "core" PCE Price Index, which excludes volatile food and energy prices. According to this index, the year-on-year inflation rate in September was 2.7%, unchanged from August, slightly higher than the expected 2.6%. Looking month-over-month, core inflation edged higher compared to the previous month, rising by 0.3%, while the previous month was 0.2%, but in line with expectations.

Ahead of the PCE data release, another inflation data - the September Consumer Price Index - exceeded expectations.

New data may provide more reasons for hawkish members of the Federal Open Market Committee of the Federal Reserve to advocate for any future rate cuts to be gradual and cautious. After all, core PCE has remained at 2.7% for three consecutive months, rather than decreasing.

Krosby said, next week "the Fed needs to acknowledge that due to strong consumer spending, a series of successful strikes leading to wage increases, and a strong labor market, they need to take a 'progressive' approach to lower rates until the FOMC is confident that inflation will not continue to rise."

In the weeks following the rate cut in September, many officials, including Federal Reserve Governor Waller and Dallas Fed President Kaplan, emphasized the need for a 'gradual' rate cut.

Paul Ashworth, Chief North American Economist at Capital Economics, stated that Federal Reserve officials may be somewhat concerned about a 0.30% month-on-month increase in core services (excluding housing prices), the largest in the past six months.

However, dovish members of the Federal Open Market Committee can also point out that inflation is gradually cooling over a longer period of time.

The median of all policymakers' forecasts in September, after a 50 basis point rate cut, is for further cuts of 25 basis points in November and December. Investors still expect the Fed to cut rates by 25 basis points at next week's policy meeting. After the PCE data was released on Thursday, this possibility still stands at over 90%.

Following the inflation data release, the Fed will also face another important data point: the nonfarm payrolls data released on Friday.

This report may not provide a clear assessment for policymakers as it may be influenced by the impact of two major hurricanes. The hurricanes have led to temporary unemployment in affected areas and Boeing has also undergone labor strikes.

Economists predict that due to the impact of two hurricanes and the Boeing strike, there will only be 0.113 million new jobs added in October. This will be a decrease from the unexpectedly strong 0.254 million new jobs added in September, with the unemployment rate expected to remain at 4.1%.

Bill Adams, Chief Economist at Comerica Bank, stated, "The Fed may place less emphasis on the economic data for October, as there are clear reasons to expect temporary distortions in the data. Therefore, they may wait until after next week's election to decide on lowering the federal funds rate by 25 basis points, observing the data for December to gain a clearer understanding of the economic performance post-hurricanes."

Daco from EY expects that the Fed "will cut policy rates by 25 basis points at every meeting before June next year, as economic growth remains strong but is slowing, and labor market trends are cooling."

However, Matt Luzzetti, Chief US Economist at Deutsche Bank, mentioned that if core inflation accelerates again in the first quarter of next year, in line with evidence of residual seasonal factors, "this would mean that the Fed's room for rate cuts next year will be significantly reduced."

Jeffrey Roach, Chief Economist at LPL Financial, added that investors "should prepare themselves mentally, as the path to lowering the inflation rate to 2% will be long and challenging."

Editor / jayden