At a critical moment, the Federal Reserve sends a heavy signal.
On the eve of the quiet period of the December Federal Reserve interest rate meeting, multiple Fed officials spoke out intensively, triggering market attention. Among them, the hawkish senior official and director of the Federal Reserve, Baumann, stated in his latest speech that he tends to cautiously cut interest rates. Progress in inflation seems to have stalled, and inflation remains the Fed's top priority task; Cleveland Fed President Beth Hamack also believes that the Fed is close to or has reached a point where it can slow down the pace of interest rate cuts.
According to the agenda, the Federal Reserve will hold its interest rate meeting from December 17th to 18th local time. Prior to this meeting, the Federal Reserve will receive November CPI data from the United States next Wednesday. Analysts point out that the performance of this data may ultimately determine the decisions of the Federal Reserve's December meeting and the path of long-term neutral interest rates.
Currently, Wall Street analysts unanimously believe that next week's inflation data may have a greater impact on the Federal Reserve as the labor market stabilizes. Fitch Ratings warns in its latest report that inflation risks in the United States are rising due to consumer resilience and upcoming tariff hikes.
[align center] Federal Reserve officials speak out intensively
On December 6th Eastern Time, multiple Federal Reserve officials spoke out intensively, releasing a series of heavyweight signals.
Among them, the hawkish senior official and director of the Federal Reserve, Bauman, stated in his speech on the same day that he tends to cautiously cut interest rates, gradually lower policy rates, and emphasized that US inflation is still uncomfortably higher than the Fed's target level of 2%.
Bauman pointed out that the upward risk of price growth remains prominent, and progress in inflation seems to have stalled. She believes that the inflation situation in the United States is more worrying than the labor market. When the Federal Reserve's FOMC decides on monetary policy, inflation remains the top priority.
Bauman mentioned that if the rate of interest rate cuts is too fast, it may also trigger a wave of investment, which will reignite inflation. It is important to pay attention to those dry powder (referring to funds that have not been invested in the market) that are still outside the field, remain cautious, and gradually strive to reach a neutral level.
Bauman further stated that the US economic situation is strong and the job market is close to full employment. With such significant growth now, it is difficult to believe that the Federal Reserve's policy interest rate is restrictive. She believes that the so-called neutral interest rate has already risen, which is the main reason for maintaining caution.
Regarding the non farm payroll data released that day, Bauman stated that even though the unemployment rate is rising, it is still at a historic low. The employment data and the latest US inflation data to be released next week will help guide her decision on interest rate policy later this month.
Beth Hammack, the chairman of the Cleveland Fed and a member of the 2024 FOMC voting committee, also believes that the Fed is approaching or has reached a point where it can slow down the pace of interest rate cuts. Considering the strong economic performance, taking slow action will enable the Federal Reserve to calibrate policy to an appropriate level of tightening over time.
Hamak stated that the US economic situation is strong, the job market is quite healthy, and the rate of inflation decline has slowed down. It is expected that there will be gradual inflation progress in the future, and the decline in housing inflation will take longer.
Hamak stated in his speech that given the current economic situation, the Federal Reserve may not be far from a neutral policy stance, and it is reasonable to maintain a contractionary monetary policy.
In addition, Goolsbee, the chairman of the Chicago Fed and a member of the FOMC voting committee next year, stated that the speed at which the Fed will cut interest rates in the future will depend on economic conditions, but he hopes that by the end of next year, the Fed will be close to the "finish line" of its interest rate policy.
Gulsby believes that current inflation or labor force have not met the conditions for the Federal Reserve to pause interest rate cuts. Only when conditions change, will the FOMC be required to pause interest rate cuts.
This year, the voting committee and the Chairman of the San Francisco Federal Reserve, Daly, stated that the job market is still in a good condition. I don't know how fast inflation will fall back to 2%.
Regarding the potential impact of US President elect Trump's policies, she stated that she currently does not know what net effects the policies will have and cannot predict what specific events will happen in the future. Uncertainty requires a cautious decision-making approach.
Last variable
According to the agenda, the Federal Reserve will hold its last interest rate meeting in 2024 from December 17th to 18th local time.
The latest data released by the Chicago Mercantile Exchange's FedWatch Tool shows that the probability of the Fed cutting interest rates by 25 basis points at its December meeting is 85.1%, significantly higher than the previous day's 71%.
Analysts point out that before this meeting, the Federal Reserve will receive November CPI data from the United States next Wednesday, and the performance of this data may ultimately determine the decision of the Federal Reserve's December interest rate meeting and the path of long-term neutral interest rates.
Currently, Wall Street analysts unanimously believe that November's employment data is not enough to change the Fed's expectation of a rate cut this month, and with the labor market stabilizing, next week's inflation data may have a greater impact on the Fed.
The US Bureau of Labor Statistics released data on Friday showing that the US added 227000 non farm jobs in November, higher than the expected 220000; However, the unemployment rate in November was 4.2%, exceeding analysts' expectations and last month's 4.1%.
Brandywine Global portfolio manager Jack McIntyre pointed out that next week's inflation report will be more impactful as inflation once again becomes a key variable. The employment data for November met expectations, so there was no significant change in the market's assessment of the Federal Reserve's policies for 2025. This paves the way for loose policies this month, but next week's CPI data may change this result.
For the upcoming US November CPI data next week, Sarah House, Managing Director and Senior Economist at Wells Fargo, predicts that the US November CPI report may indicate that progress in combating inflation is stalling. Specifically, it is expected that the US non seasonally adjusted CPI annual rate in November will rise from 2.6% to 2.7%, and the non seasonally adjusted core CPI annual rate will remain in the narrow range of 3.2% -3.3% for the sixth consecutive month.
Matthew Luzzetti, Chief US Economist at Deutsche Bank, predicts that the Federal Reserve is likely to cut interest rates by another 25 basis points in December and maintain them unchanged throughout 2025. The reason is that US President elect Trump's tax cuts will drive up growth and spending, while protectionist trade plans may exacerbate price increases, keeping inflation above 2.5%.
Fitch Ratings also stated in its latest report that inflation risks in the United States are rising due to consumer resilience and upcoming tariff hikes, and it is expected that the Federal Reserve will slowly cut interest rates to neutral levels next year.
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