Since the Federal Reserve's substantial interest rate cut of 50 basis points last month, employment and economic data have unexpectedly trended upwards. Coupled with the recently released minutes from the September meeting, these have not only completely extinguished market hopes for another significant rate cut but also inevitably lead to speculation about whether the Federal Reserve will hit the "pause button" at the upcoming meetings. Consequently, the U.S. September CPI data has garnered increasing attention. As overall inflationary pressures in the U.S. continue to ease, the market anticipates that the Federal Reserve will not continue with aggressive rate cuts in the future.

CPI Six Consecutive Decreases

Data released by the U.S. Department of Labor on the 10th showed that the U.S. CPI in September rose by 2.4% year-on-year, marking the sixth consecutive month of decline and reaching the lowest level since February 2021. The estimate was for a 2.3% increase, with the previous value being a 2.5% increase. The U.S. CPI in September increased by 0.2% month-on-month, with the estimate being a 0.1% increase and the previous value being a 0.2% increase.

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Excluding food and energy prices, the U.S. core CPI for September rose by 3.3% year-on-year, the highest since June, with the estimate being for a 3.2% increase and the previous value being a 3.2% increase. The U.S. core CPI for September increased by 0.3% month-on-month, with the estimate being a 0.2% increase and the previous value being a 0.3% increase.

FX168 financial analyst Tang Qingtian analyzed that with the Federal Reserve's focus shifting to the labor market, the probability of reflation in the U.S. is low, and U.S. inflation remains on a downward trajectory.

At last month's interest rate meeting, the Federal Reserve reduced the benchmark policy rate from 5.25% to 5.5%, which had been maintained since July 2023, by 50 basis points to 4.75% to 5%. However, considering the uncertainty of U.S. inflation data in the fourth quarter and the stickiness of core inflation, the market's debate over the Federal Reserve's rate cut expectations in November has gradually shifted from whether it will cut by 25 basis points or 50 basis points to whether the Federal Reserve will skip the November rate cut.

As overall inflationary pressures in the U.S. continue to ease, the market anticipates that the Federal Reserve will not continue with aggressive rate cuts in the future. Tang Qingtian stated that, on one hand, data shows resilience in the U.S. job market, with no immediate risk of rising unemployment rates triggering recession signals. On the other hand, there is significant disagreement among Federal Reserve officials regarding the path of rate cuts, with some officials not advocating for starting with an aggressive 50 basis point cut and supporting future gradual rate cuts in smaller increments.

No Longer in a Hurry to Cut Rates

These factors have led the market to quickly adjust its expectations for the Federal Reserve's rate cut in November, with traders increasing their bets on a 25 basis point rate cut by the Federal Reserve in November, while estimating that the probability of the Federal Reserve keeping rates unchanged in November has risen to nearly 30%. On the other hand, the minutes released on Wednesday showed that at the September interest rate meeting, Federal Reserve officials were divided on the extent of the rate cut, with the vast majority supporting the ultimately approved larger cut, but some also supporting a smaller 25 basis point cut.

According to CNBC, a U.S. financial news website, Federal Reserve officials agreed on a rate cut at the September meeting but were uncertain about the magnitude of the cut. The vast majority of attendees favored a 50 basis point cut, but some expressed concerns about reducing such a large amount.Reports indicate that some Federal Reserve officials prefer a smaller interest rate cut, merely a quarter of a percentage point, as they aim to ensure that inflation continues to trend downwards and are less concerned about employment conditions. Ultimately, only one Federal Open Market Committee member, Governor Michelle Bowman, voted against a half-percentage-point rate cut. Since 2005, the Federal Reserve has been known for its unified monetary policy, marking the first time a governor dissented in a rate decision.

The report mentions that since the Federal Reserve meeting, U.S. economic indicators suggest that the labor market may be stronger than officials anticipated when they supported a 50 basis point rate hike. The minutes state that the vote to approve a 50 basis point rate cut was "considering the balance of risks to inflation progress and the labor market."

According to Reuters, there are differing views within the Federal Reserve on the current tightness of monetary policy, with some emphasizing the need to communicate externally that even with rate cuts, the reduction of the balance sheet (quantitative tightening) may continue. The minutes also read: "Almost all participants agreed that the upside risks to the inflation outlook have diminished, and the downside risks to the employment outlook have increased. Therefore, these participants now assess that the risks to achieving the dual mandate goals of the (FOMC) Committee are roughly balanced."

Regarding inflation, the minutes show that almost all participants concurred that the upside risks to inflation have weakened, with increased confidence in inflation continuing to converge towards 2%, and listed some factors that may continue to exert downward pressure on inflation, including a further moderate slowdown in real GDP growth due to the Federal Reserve's monetary tightening; softening global commodity prices, among others.

Data remains key.

On the eve of the CPI release, several Federal Reserve governors spoke on the prospect of rate cuts, indicating that the next rate cut still depends on data. On October 8th local time, Federal Reserve Vice Chairman Philip Jefferson stated in a college lecture that the Federal Reserve's 50 basis point rate cut last month was "timely," aligning with the Federal Reserve's dual mandate of achieving 2% inflation and maximum employment.

"The cooling of the labor market is evident," Jefferson said, noting that economic activity is growing at a robust pace, inflation has significantly decreased, and the labor market has cooled down from its previously overheated state. When considering further rate cuts, he will focus on future data, prospects, and the balance of risks.

Boston Fed President Susan Collins stated in a speech in Boston that as inflation trends weaken, the Federal Reserve is likely to implement more rate cuts. The next step in monetary policy should focus on protecting the economy. She also emphasized that rate cuts are not on a preset path, and the Federal Reserve will still rely on data (for rate cuts) and adjust as the economy evolves.

"I do not want to see further slowing in the labor market," San Francisco Fed President Mary Daly said in an interview, noting that the labor market has already slowed down, and she is "quite confident" about inflation moving towards 2%. Daly expressed her full support for the Federal Reserve's decision to cut rates by 50 basis points last month and stated that if the economy develops as she expects, there may be 1-2 more rate cuts by the end of the year.

Expectations for Federal Reserve rate cuts continue to be thwarted, causing the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," to break through 4%, with a clear trend of a strong dollar recovery.On October 9th, the US Dollar Index rose by more than 0.4% to 102.89, approaching its highest level in eight weeks, with non-US currencies generally falling. Barclays foreign exchange strategist Skylar Montgomery Koning stated in the latest report that the market's bearish sentiment on the US dollar has reversed, and the continued unwinding of US dollar short positions may further support the US dollar.

If inflation once again exceeds market expectations, it may continue to suppress interest rate cuts, putting pressure on global stocks, bonds, commodities, and gold, among other major asset classes, and supporting the performance of the US dollar. Due to uncertainty about the economic outlook, CICC (China International Capital Corporation) said it maintains a neutral attitude towards the prospects of overseas stocks, and the market can wait for policy support from the Federal Reserve before increasing its layout.