On Monday local time, the Federal Reserve of New York released its November Consumer Expectations Survey report. The continuously declining inflation expectations, combined with complex feelings about the job market, are all the states that the Federal Reserve hopes to see.
Affected by this, the Dow Jones Industrial Average hit a new year high after opening on Monday and took a small step forward towards hitting a historic high.
(Dow Jones daily chart, source: TradeView)
Inflation expectations are slowing down, employment expectations are chaotic
According to a survey by the New York Federal Reserve, consumer one-year inflation expectations for November steadily decreased from 3.6% in October to 3.4%, the lowest since April 2021. Meanwhile, the inflation expectations for the three-year and five-year periods continued to remain unchanged from the previous month, at 3.0% and 2.7%, respectively.
(Source: New York Fed)
On many key inflation items, American consumers have also seen a decrease in their expectations for price increases over the next year. The expected increase in gasoline prices has decreased from 5% in October to 4.5%, and the expected increase in rent has also decreased to 8%, the lowest since January 2021.
At the same time, the New York Federal Reserve's survey also shows consumers' complex expectations for the labor market: although respondents have decreased their expectations for an increase in unemployment rate in a year, they believe that the probability of voluntarily resigning (+1.4% compared to October) or being laid off (+0.7% compared to the previous month) is significantly higher. In addition, consumers' expectations for their salary growth rate in the next year have slightly decreased to 2.7%, the lowest since August 2021.
Although 3% may not seem very low, renowned macro journalist Timiraus also warned after the data was released that inflation expectations themselves may exceed actual inflation, as was the case when the inflation rate was below 2% from 2014 to 2019. The target anchored by the Federal Reserve is a 2% inflation rate, not a 2% inflation expectation.
This report comes just in time
This report from the New York Federal Reserve once again confirms the fact that inflation expectations have weakened before the Fed releases its final interest rate decision for the year on Wednesday (early Thursday, Beijing time).
Considering that Federal Reserve officials generally believe that the direction of inflation expectations may have a strong impact on the current inflation level, today's data will also support the position that the "interest rate hike cycle is over". In line with the New York Fed report, the one-year inflation expectation for the University of Michigan announced last Friday fell from 4.5% last month to 3.1%.
At a press conference after the FOMC meeting in early November, Powell also mentioned that in the past few years of soaring inflation, the relative control of inflation expectations has given policymakers confidence that inflation can return to 2%.
However, just like the policy dilemmas faced by major central banks around the world, global investors know that the Federal Reserve will cut interest rates next year, but how to do so will have completely different results. At the same time as announcing the interest rate decision, the Federal Reserve will also release the latest dot matrix chart, showing the FOMC members' latest views on the subsequent trend of interest rates, as well as the implicit prediction of the "first rate cut" time.
Michael Gapen, Chief US Economist at Bank of America, interpreted that this week's decision itself is unlikely to be unexpected - the Federal Reserve will maintain policy interest rates unchanged and keep all options on the table. But for the subsequent policy path, it can be said that it is currently at the peak of uncertainty.
Gap and his colleagues in economics have also provided the three most likely scenarios for the direction of the US economy, inflation, and Federal Reserve policy next year:
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