On Thursday local time, the U.S. will release September consumer price index (CPI) data.
The Fed's next meeting is three weeks away, and with the job market still hot, the latest price indicator could be an important reference for whether to continue raising interest rates this year. The producer price index (PPI) unexpectedly rose above market expectations in September due to higher energy and commodity prices, which also added uncertainty to the CPI outlook. The tightening of financial conditions caused by the recent rise in Treasury yields has widened the dovish camp within the Fed, but the extent to which geopolitical factors disrupt energy prices could be a big variable affecting the future path of policy.
Core inflation is expected to continue to fall
Considering the recent downturn in the U.S. manufacturing sector and the stabilization of commodity prices, the market expects that the overall CPI is expected to fall slightly to 3.6% last month. By contrast, a further cooling in core inflation could ease some of the Fed's policy pressure. The current forecast is for September core CPI to fall from 4.3% to 4.1%.
However, from the September PPI data, although the base effect has further weakened, energy prices may still become an important driver of prices.
The cooling of US inflation over the past two months has been hampered by the impact of energy prices, with the CPI rising 0.6 per cent month-on-month in August and pushing the headline CPI to 3.7 per cent year-on-year.
It is worth mentioning that Russian President Vladimir Putin said at the "Russian Energy Week" meeting held in Moscow on Wednesday (11) that the OPEC+ production cut agreement may continue to be extended, and OPEC+ member states will fully fulfill their commitments and successfully meet all challenges. Earlier, Saudi Arabia and Russia cooperated through voluntary production cuts, which once pushed international oil prices to near $100 in September.
Boris Schlossberg, macro strategist at BK asset management, said in an interview with China Business News that as the situation in the Middle East heats up, energy prices may re-emerge as a price disturbance. For the Fed, it is far from time to declare victory.
On the other hand, used-car prices have begun to stabilize and recover. Wholesale prices for used cars in Manheim rose 1.0 percent in August, largely due to concerns that the United Auto Workers strike could slow new car retail sales and shift buyers to the used market. As there is no sign of an end to the strike of the association, it may continue to be a destabilizing factor for price fluctuations in the short term.
At the same time, core CPI has continued to fall, with core inflation falling to 2.4% on an annualized basis over the last three months, moving closer to the Fed's target.
Among the sub-indicators, rent price pressures are set to ease. According to ApartmentList's National Rent report, the national rent index fell 0.5% in September from the previous month, accelerating further from August and marking the second consecutive monthly decline.
The Federal Reserve is closely watching the impact of labor costs on price increases. A better-than-expected September nonfarm payrolls report showed job openings rose back to 9.6 million nationwide, according to the Labor Department. Based on jobless claims, it appears that companies are simply cutting back on hiring rather than laying off workers to address changes in labor demand.
Mr Schlossberg told CBN that inflation in the services sector remained high due to strong demand for jobs. Then, as the economy slows and the job market softens, the balance between supply and demand for labor helps restrain wage growth, easing cost pressures across the service sector. Given the Fed's focus on core inflation, this would allow the committee to remain patient.
Whether to keep the rate hike option open
Since the September meeting, mid - and long-term U.S. Treasury yields have risen sharply, with the 10-year and 30-year bonds hitting their highest levels since 2007 last week.
The tightening of financial conditions, driven by the surge in US Treasury yields, not only increased volatility in risky assets, but also exceeded the Fed's expectations and caught the attention of policymakers. "We are at a sensitive time for risk management and must balance the risks of policy being too loose or too restrictive," Fed Vice Chairman Thomas Jefferson said in a speech to the National Association for Business Economics on Tuesday. "Financial conditions will tighten through higher bond yields, and this needs to be borne in mind when assessing future policy," he added.
Bank of Montreal senior economist Sal Guatieri told the First Financial reporter that the Federal Reserve is clearly preparing for November to stay on hold, with inflation slowing and the economy soft landing, the Federal Reserve has no need to raise interest rates further.
Several hawkish members have also softened their stance, with Fed Governor Christopher Waller saying on Wednesday that "financial markets are tightening and that will have some benefits." The Fed will closely monitor this development to see how it affects policy in the months ahead." 'he said.
As a result, investors are weighing the prospect of the Fed abandoning interest rate hikes. The policy-sensitive 2-year Treasury briefly fell back below 5 per cent, while the benchmark 10-year rate neared the 4.60 per cent mark, its lowest level in nearly a month.
As for the Fed's next policy options, Guatieri believes that the disinflation process will become very slow and may not reach the 2% target until early 2025. As a result, the Fed will maintain its current policy stance, keeping interest rates at a restrictive level and communicating with the outside world in a timely manner.
Schlossberg told CBN that judging from the minutes of the Fed meeting, it will be very cautious in taking further policy actions, because policy risks are increasing. What the Fed wants is for the Labour market to cool down as soon as possible, while avoiding an early shift in market expectations, so he favours keeping rates on hold in November, while keeping the door open for possible future rate rises.