Source: Jinshi Data

Traders are increasingly confident that the Federal Reserve will cut rates again next week. However, with the release of the November Consumer Price Index (CPI) report on Wednesday, there are some hurdles that could undermine this belief.

According to Dow Jones, economists expect both the overall CPI and core CPI (excluding volatile food and energy prices) to show a monthly increase of 0.3%.

The Producer Price Index (PPI) for November, scheduled to be released this Thursday, is expected to show a growth of 0.2% in both its overall and core readings.

Economists can then weigh the components of the CPI and PPI to estimate how the Fed's preferred inflation measure, the Personal Consumption Expenditures Index (PCE), will change.

This calculation method may have its flaws, but Wall Street's view is that if the inflation rates in these two reports meet or fall below expectations, it is highly likely that the Fed will cut rates again next week.

Aditya Bhave, an economist at Bank of America, said in a note: "Before the November employment report was released, we had said that inflation is more important for the Fed's decision in December. We suggested that if this week's CPI and PPI data indicated that core PCE inflation exceeds 0.30%, the Fed would not cut rates in December. We stand by this view."

Others on Wall Street believe that the threshold for the Federal Reserve to maintain interest rates unchanged may be higher.

A report from JPMorgan's trading department on Tuesday pointed out that bond traders will continue to bet on rate cuts unless the CPI reading exceeds 0.40%.

According to the CME FedWatch Tool, the current trading in the Federal Reserve fund futures market shows an 86% chance of a rate cut next week, up from about 73% a week ago.

The Federal Reserve has cut borrowing costs twice this year, reducing them by 50 basis points in September and by 25 basis points in November. The benchmark federal funds rate is currently at 4.50% to 4.75%.

If the Federal Reserve ultimately lowers the benchmark interest rate, it will be the third consecutive time the central bank has done so at a meeting, despite inflation not fully returning to the 2% target.

Concerns about the labor market and political views may be two key reasons for the Federal Reserve to continue cutting rates. "We also believe that from a political standpoint, cutting rates is the path of least resistance," said Bhave from Bank of America.

Several FOMC participants stated that they believe there is still considerable room for further rate cuts. In light of this, not cutting rates in December could be seen as a preemptive response to the incoming government's fiscal or trade policies. Powell has made it clear that the Federal Reserve will not do this.

Prior to the release of Wednesday's CPI data, bond traders were seen offloading their positions and adopting a more neutral stance.

JPMorgan's weekly survey released on Tuesday showed that after three consecutive weeks of increases in US Treasury bonds, the bank's clients have shifted from their strongest bullish stance this year to a neutral position on US Treasuries.

Kimmy Tong, a global markets and Forex strategist at Everbright Securities International, stated, "The market is looking for evidence to support continued interest rate cuts in the USA. Given that US CPI data has gradually rebounded since October, the significance of the November CPI data is crucial in proving the rationale for two rate cuts in the first half of 2025."

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编辑/jayden