US inflation edges higher, but Fed easing still on track
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
Higher-than-expected US inflation data released on Thursday added to recent concerns that the Federal Reserve may be more hesitant in cutting interest rates. The core consumer price index for September, which excludes volatile food and energy prices, rose 0.3% for the second consecutive month, slightly above consensus estimates of 0.2%, bringing year-over-year core inflation to 3.3%, up from 3.2% in August.
Stronger-than-expected employment data had already led markets to scale back the likelihood of another bold 50-basis-point cut, and the CPI data has confirmed this shift in expectations. The latest CME FedWatch data now show a 0% probability of such a large move, down from over 35% just a week ago. Markets now imply a roughly 15% chance that no cut will occur at the upcoming policy meeting, up from 0% last week.
But whether the Fed decides to reduce rates at a faster or more gradual pace, the direction of travel remains unchanged, in our view.
Price pressures continue to subside, despite monthly fluctuations. While inflation was slightly higher than expected, there were also some positive developments. Headline inflation eased to 2.4%, marking the lowest rate since 2021. Furthermore, in September, the index for shelter, which includes rents and owners’ equivalent rent, rose by just 0.2%, cooling from the 0.5% recorded in August and 0.4% in July. Notably, even prior to the latest shelter figures, data on actual rents had pointed to only modest increases over the past 18 months.
Additionally, it is worth noting that CPI was also disappointing in August. But the personal consumption expenditure index (PCE), the Fed's preferred measure of inflation, for the same month came in below expectations and showed annual inflation slowing to the lowest level since February 2021. It is possible this divergence between the two main inflation measures could occur again in September, with a more reassuring PCE release later this month.
Recent comments by top Fed officials have underlined that they are not placing too much weight on individual data releases. “Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving” downward, according to New York Fed President John Williams. Chicago Fed President Austan Goolsbee said “the overall trend” for inflation was clearly moving down, and Richmond Fed President Thomas Barkin said inflation was “definitely headed in the right direction.”
The minutes of the Fed's last meeting underline a desire by top officials to move rates down from current restrictive levels. In discussing the outlook for monetary policy last month, Fed officials anticipated a “move toward a more neutral stance of policy over time” if economic data continue to come in about as expected, according to the minutes released Wednesday. While policymakers may not see the urgency to move as quickly as they did in September, as some “would have preferred a 25-basis-point reduction,” they acknowledged the restrictiveness of monetary policy. In addition, the minutes noted that the overall path of policy normalization would be more important in determining the degree of policy restriction, rather than the specific amount of easing.
So, we continue to recommend investors position for a lower-rate environment, deploying excess cash, money market holdings, and expiring fixed-term deposits into assets that can offer more durable income. These would include bond ladders, medium-duration investment grade bonds, diversified fixed income strategies, and equity income strategies. We also believe lower rates make a favorable backdrop for equities, and favor AI beneficiaries and quality stocks.
