In case you missed the headlines:
Inflation numbers were higher than expected while initial jobless claims also jumped, with little hurricane-related impact noted. The dollar made gains on the back of this, but they were quickly erased. That’s before Bostic came in to lift the dollar again ahead of another round of late selling.
So, what gives?
If anything, it might tell us that there is a relatively low bar for the Fed to cut interest rates next November. A 50 basis point move looks dead in the water now but it isn’t Every single data point The Fed says it shouldn’t cut interest rates, and they’ll likely keep them flowing at least.
The consumer price inflation report certainly wasn’t perfect. Food prices have risen along with shelter costs, with inflation in services continuing to keep core prices steady. As a result, the core annual inflation rate rose for the first time in a year and a half.
But housing rental prices were the weakest since June and energy costs also fell by about 2% during the month. This helps keep the headline readable. On balance, this indicates some bumps in the road in the process of lowering inflation – at least for now.
Therefore, there is still an argument that 25 basis points is the way to go.
As for unemployment claims, that will be an interesting place to watch moving forward. As Greg pointed out, the largest increases in claims are not focused on those states affected by weather or strikes. Sure, there is some impact from the hurricane but we will get better clarity in the coming weeks.
Fed funds futures are still pricing in roughly 86% odds of a 25 basis point rate cut next month, and that’s not much changed from before all of yesterday’s events. Bostic’s comments changed that a little but it didn’t last and these sentiments were also reflected in the dollar.
In short, the bottom line at the moment seems to be that the threshold is too low for the Fed to cut rates by 25 basis points. Meanwhile, the pause threshold is quite high by its appearance.
We’ll get a better idea from more Fed speeches later today. But unless other policymakers start echoing Bostic’s position, it will be difficult to change the prevailing narrative and what markets are pricing in now.