Inflation Data Disrupts Market Expectations; Fed Officials Reiterate Support for "Gradual" Rate Cuts

Amidst the market sentiment turmoil caused by the higher-than-expected CPI data in the United States this week, the statements of Federal Reserve officials have become an important factor affecting the market's expectations for the Fed's future rate cut path.

On Friday, Eastern Time, Dallas Federal Reserve President Lorie Logan reiterated her view that interest rates should move slowly towards more normal levels, adopting a "gradual" rate cut approach.

A CPI data report stirs market waves

Last month, the Federal Reserve implemented its first rate cut in four years, with a significant reduction of 50 basis points. The reason for such a substantial rate cut was signs that the U.S. labor market was weakening, while inflation was also retreating towards the Fed's 2% target.

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However, the path to cooling U.S. inflation has not been smooth. On Wednesday, Eastern Time, Logan warned that U.S. inflation still poses an upside risk.

Backing up her remarks was data released on Thursday. The data showed that the underlying inflation increase in the United States for September was higher than expected. The U.S. core consumer price index (excluding food and energy costs) rose by 0.3% for the second consecutive month, breaking the trend of continuous decline.

This unexpected data has disrupted the market's expectations for rate cuts by the Federal Reserve within the year.

After the data release, although several Federal Reserve officials, including New York Federal Reserve Bank President John Williams, indicated that they were not overly concerned about this CPI data and hinted that they support continued rate cuts.

However, Atlanta Federal Reserve Bank President Raphael Bostic stated after seeing this data that he is open to not cutting rates at the Fed's remaining two meetings this year:

"The recent mixed data suggests that maybe we should pause rate cuts in November. I am absolutely open to that."Bostic's remarks once led the market to raise the probability of no rate cut in November to about 25%, also making the outlook for the Fed's rate cuts more uncertain.

Logan reiterated: Supports gradual rate cuts

On Wednesday this week, Logan had expressed support for "gradual" rate cuts. And on Friday this week, amid unexpected inflation data that disrupted market sentiment, Logan reiterated her support for a "gradual" approach to rate cuts.

Logan also believes that although the US economy is "strong and stable," there are also "significant" risks in the future. Logan said, "As we move towards neutrality, it's really important to look forward, and we need to balance the risks we face in a very gradual way."

Compared with Bostic's "no rate cut" comments, Logan's stance is generally more "neutral," that is, she supports rate cuts but does not support too rapid rate cuts. She believes that, looking at long-term trends, the cooling of US inflation has been "very widespread."

Considering that the US initial jobless claims data also rose, along with optimistic statements from other Fed officials including Logan, as of the time of writing, the market's expectations for "no rate cut" have significantly diminished.

According to the CME FedWatch tool, as of the time of writing, the market expects the probability of the Fed not cutting rates in November to have dropped to 10.5%, while the probability of a 25 basis point rate cut is 89.5%.