"US Inflation Exceeds Expectations: Divergent Fed Opinions on Future Decisions"

Following the strong non-farm employment report in September, the U.S. Consumer Price Index (CPI) for September unexpectedly exceeded market expectations. Meanwhile, the minutes from the Federal Reserve's September meeting revealed disagreements among officials about the direction of future monetary policy.

Several analysts pointed out to the Southern Finance and Economics All-Media reporter that the Federal Reserve may slow down the pace of rate cuts; however, considering the uncertainties in economic growth and market demands, the Federal Reserve may still implement two rate cuts within the year to support the economy.

U.S. September CPI Exceeds Expectations Across the Board

On October 10th local time, the U.S. Bureau of Labor Statistics released the latest data showing that the U.S. Consumer Price Index (CPI) in September increased by 2.4% year-on-year. Although this is a decrease from August, it is still higher than the market-expected 2.3% and represents the lowest year-on-year increase since February 2021. The data indicates that the core CPI, excluding food and energy, increased by 3.3% year-on-year, surpassing the market forecast of 3.2% and rising from the previous month's 3.2%. Analyzing from a monthly perspective, the September CPI increased by 0.2% month-on-month, matching the previous month's data and exceeding the market expectation of 0.1%.

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Relevant analysis points out that when the Federal Reserve cut rates by 50 basis points in September, the market was optimistic, believing that inflation had been controlled. However, the U.S. September non-farm employment report shattered this optimistic expectation. The report showed that the number of new jobs added in the U.S. in September far exceeded expectations, the unemployment rate unexpectedly dropped to 4.1%, and the annual wage growth rate increased, triggering market concerns about the economy. Former U.S. Treasury Secretary Lawrence Summers even publicly criticized that the Federal Reserve's 50 basis point rate cut in September was a mistake.

On this issue, Professor Li Huihui from the EMLYON Business School pointed out to the Southern Finance and Economics All-Media reporter that the overall inflation trend in the United States has been gradually slowing down since the second half of the second quarter, and this trend has not changed to date. In several meetings of the Federal Reserve, including the minutes of the September meeting, officials' recognition of the inflation trend was fully reflected. At the same time, since the first rate cut in September, the Federal Reserve's focus has gradually shifted from inflation to employment data.

Li Huihui told the reporter, "I believe the downward trend of inflation has been basically established. Although the CPI data slightly differs from the estimated value, whether it is slightly higher or slightly lower, the market's interpretation should not be too hawkish. Therefore, this is not a decisive factor in determining the subsequent rate cut policy in the United States."

Ma Wei, a research assistant at the American Studies Institute of the Chinese Academy of Social Sciences, pointed out in an interview with the Southern Finance and Economics All-Media reporter that there is no direct strong connection between the inflation rate exceeding expectations by 0.1% and the Federal Reserve's 50 basis point rate cut. He explained that the transmission of monetary policy to the entire real economy actually has a certain lag. Ma Wei emphasized that the Federal Reserve's confidence in controlling inflation does not entirely depend on the changes in a particular month's data.

Ma Wei added: "Although we see that inflation in September was slightly higher than expected, it still continued the downward trend for the sixth consecutive month. Therefore, from this perspective, the September CPI data did not bring as much impact to the market as we had anticipated."

There is a significant divergence within the Federal Reserve.Despite data showing a downward trend in U.S. inflation, there is disagreement within the Federal Reserve about the direction of monetary policy. According to the minutes of the Federal Reserve's September meeting, several participants objected to a 50 basis point rate cut.

Participants who supported a 50 basis point rate cut believed that this decision would better align monetary policy with recent inflation and labor market data. Although Governor Bowman was the only official to publicly oppose a rate cut, many within the committee favored a 25 basis point reduction. They noted that "a 25 basis point reduction would be in line with the gradual path of policy normalization, providing policymakers with time to assess the restrictive nature of policy in economic development."

Some participants added that a 25 basis point adjustment might signal "a more predictable path for policy normalization."

Hu Jie, a professor at Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and former senior economist at the Federal Reserve, pointed out to reporters from Southern Financial Media that the Federal Reserve's decision to cut rates by 50 basis points was too aggressive. Hu Jie said that, looking at the inflation data, although inflation is generally moving towards the 2% target, the core PCE indicator has hardly changed in the past two to three months, indicating that the speed of inflation approaching the target value is very slow. In terms of overall economic indicators, including unemployment rate and economic growth, the economic growth at that time was relatively healthy. The unemployment rate actually remained at 4.2%, which is still some distance from the natural rate of unemployment of 4.5% to 5%, indicating that unemployment is not severe. In terms of economic growth, international institutions generally predict an annual growth of more than 2%, which is a very healthy state.

Hu Jie pointed out, "Under normal circumstances, whether the Federal Reserve cuts or raises interest rates, it should take 25 basis points as the standard step. If a non-standard step is taken, there is usually a special reason, but in this decision, we did not see enough reasons to support such a radical move. The specific unemployment indicators after the decision were also much better than expected, once again proving that the decision at that time was too aggressive."

Li Huihui believes that the reason the Federal Reserve cut rates significantly in September was actually because its timing for rate cuts was slightly late. In his view, the best window for the Federal Reserve to cut rates should have been in July.

Li Huihui pointed out that the rate cut in September can be seen as a compensation for not cutting rates in July, that is, it should have been cut by 25 basis points in July, and then cut by another 25 basis points in September, so that the total rate cut in September reached 50 basis points. In this context, if it is regarded as a supplementary rate cut, then the first rate cut of 50 basis points can be understood.

He also mentioned, "Participants emphasized that this 50 basis point rate cut should not be interpreted as the economy about to enter a recession. This is also an important message revealed in the minutes of this meeting. The Federal Reserve believes that this rate cut should not be interpreted by the market as a problem with the U.S. economy, and also emphasizes that a significant rate cut should not be seen as the norm."

The subsequent path of the Federal Reserve's rate cuts is unclear.

Recently, several Federal Reserve officials have spoken out intensively. San Francisco Federal Reserve President Daly said she "fully" supports the 50 basis point rate cut last month; she expects one to two more rate cuts this year. Dallas Federal Reserve President Logan believes that after the significant rate cut in September, the Federal Reserve should slow down the pace of rate cuts.According to the FedWatch on the Chicago Mercantile Exchange, the market's expectation for a 25 basis point rate cut in November has risen to 89.5%, with no rate cut becoming the second most popular option.

Ma Wei analyzed that after observing employment and inflation data, the market's expectation for two consecutive rate cuts of 25 basis points in November and December is declining, and the financial market has made anticipatory adjustments to this change. It is worth noting that the yield on the U.S. ten-year Treasury bond has climbed back to a high of 4%, and the reasons behind this change need to be carefully analyzed. The market needs to assess whether this increase is due to a reduction in expectations for the Federal Reserve's monetary policy rate cuts, or due to increased concerns about inflation. Ma Wei believes that both factors are present, and the market's expectations for subsequent rate cuts are gradually cooling.

Ma Wei further pointed out that in an election year, the Federal Reserve's decision-making may be subject to additional influences from changes in economic policy. Although the Fed has relative independence and its monetary policy is generally not affected by political parties, the election results and the potential impact of different parties on the U.S. economy are still factors that must be considered.

Yang Panpan, Director of the International Finance Research Office and Deputy Researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, pointed out in an interview with reporters from Southern Financial Media that since the beginning of this round of easing cycle, the Federal Reserve's policy adjustments will continue to be further calibrated based on new economic data. This approach has been a significant characteristic of the Federal Reserve's policy since the pandemic.

Regarding the policy intensity, Yang Panpan emphasized that whether it is a rate cut or a rate hike, the Federal Reserve's measures have always been relatively aggressive. For example, at the beginning of the pandemic, the Federal Reserve quickly reduced the interest rate to zero, and in the subsequent rate hike cycle, a total of 525 basis points were raised, with the largest single increase reaching 75 basis points. This indicates that the Federal Reserve's policy intensity has always been large.

Yang Panpan believes that from the current economic situation, the Federal Reserve still has ample room for policy adjustments. According to the neutral interest rate range published by the Federal Reserve, which is approximately 2.75% to 3%, there is still about 200 basis points of room for rate cuts, providing greater flexibility for future policy adjustments.