Paul McCulley, former chief economist of Pacific Investment Management Corporation (PIMCO) in the United States, recently stated that the next step for the Federal Reserve will be to cut interest rates, as October inflation is a key point for Federal Reserve officials to 'change the rules of the game'.
McCally pointed out in a media interview that inflation slowed down in October, and the year-on-year growth rate of the Consumer Price Index (CPI) dropped to 3.2%, lower than analysts' expected 3.3%. This is a major victory for the Federal Reserve. Over the past year, the Federal Reserve has been aggressively raising interest rates to control soaring prices.
McCally stated that the most important thing is the "cracks" in housing inflation, with the housing inflation rate rising by 6.7% year-on-year in October, significantly weaker than the 7.2% in September - which is good news for overall inflation as housing was the biggest contributor to the rise in inflation in September.
I think this (a decrease in inflation) is a game changer. Today is a day of rational prosperity, as the data clearly shows what we have been waiting for for a long time. "McCalli said," I think this allows the Federal Reserve to confidently announce that policies are sufficiently restrictive, which is a big deal because it means they have completed tightening and the next step will be easing
Expected increase in interest rate cuts
McCally added that investors will discuss when the Federal Reserve will cut interest rates, but most expect the first rate cut to occur sometime next year.
According to CME's FedWatch tool, the market expects an 85% probability that interest rates will be lower than the current level (i.e. a rate cut) by June 2024.
Traders bet on Tuesday that the cooling of inflation will cause the Federal Reserve to abandon further interest rate hikes and begin cutting rates in May next year. The price of federal funds rate futures contracts suggests that the possibility of the Federal Reserve's first rate cut in May is greater than 50%, and the short-term target interest rate by the end of 2024 will be a full percentage point lower than now.
At the same time, interest rate futures prices suggest that the probability of the Federal Reserve raising policy interest rates above the current 5.25% -5.50% range is only around 5%, compared to 28% before the CPI report is released.
UBS even boldly predicts that as the Federal Reserve shifts towards a "comprehensive easing" model, it may cut interest rates by at least 275 basis points by the end of next year.
The decrease in interest rates is good news for the stock market, as last year, with the Federal Reserve embarking on an aggressive rate hike cycle, the US stock market suffered heavy pressure. Market experts predict that the Federal Reserve's shift towards interest rate cuts may trigger a new bull market in US stocks.
However, some economists also warn that there is a risk of the Federal Reserve cutting interest rates too early, which may ultimately lead to an increase in inflation. Economist Mohammad Erian said that this could lead to consumer inflation expectations spiraling out of control, leading the economy into a stagflation crisis.