The recent drop in U.S. consumer prices in October, falling more than expected, has sparked speculation about the Federal Reserve potentially cutting interest rates in early 2024. The 10-year T-note yields experienced a significant decline on Tuesday, reaching a 1-3/4 month low at 4.424%. This follows a surge in the 10-year T-note yield last month to a 16-year high of 5.019%.
The easing of price pressures has altered market expectations, removing the likelihood of a Fed rate hike this year and accelerating the anticipated timing of a potential rate cut in 2024. The market is currently pricing in over 50 basis points of rate cuts by July of next year, which is about double the amount anticipated at the end of the previous month.
Analysts suggest that inflation concerns may be diminishing, with some even warning of increased deflation risks. Bank of America stated that the Federal Reserve is likely finished with interest rate hikes, while Cathie Wood of Ark Investment Management suggested that deflation is already underway in various U.S. industries. However, concerns have been raised about the potential impact on the Fed’s credibility if interest rates are cut too quickly.
Despite the easing of price pressures, core inflation in the U.S. remains at 4.0%, twice the Fed’s 2% target. Policymakers are under pressure to maintain interest rates at current levels, with analysts suggesting that sticky core prices could prompt the Fed to keep rates higher for a more extended period than expected. Bloomberg Intelligence indicated that those expecting rate cuts by the middle of next year might be incorrect, emphasizing that the Fed is likely to wait to ensure that data continues to confirm a decline in inflation. Pacific Investment Management also noted that inflation will take time to decrease, keeping the Fed on hold for a more extended period than usual in a typical economic cycle.
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