Rising Pivot Expectations on US CPI Slowdown... Fed Insiders and Outsiders Warn "Long Way to Go" (Comprehensive)

The trend of slowing inflation in the United States has been confirmed once again, rapidly spreading expectations of a 'pivot' (direction change) in the first half of next year. It is anticipated that the Federal Reserve's (Fed) aggressive tightening cycle has ended, and interest rate cuts could materialize soon. However, there are also many voices inside and outside the Fed pointing out that "there is still a long way to go." This is interpreted as a warning based on concerns that growing market expectations for a pivot could inadvertently fuel inflation.

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Osthan Goolsby, president of the Chicago Federal Reserve Bank and a representative dove (favoring monetary easing) within the Fed, said on the 14th (local time) at the Detroit Economic Club that the October Consumer Price Index (CPI), which slowed more than expected, "looks like a pretty good report. Progress is continuing," but added, "there is still a long way to go." Goolsby, who has voting rights at this year’s Federal Open Market Committee (FOMC), cautioned that "there are always some obstacles on the path to lower inflation," warning that the remaining process to achieve the 2% price stability target will not be easy.

On the same day, Thomas Barkin, president of the Richmond Fed, also attending an event in Westminster, South Carolina, said, "I cannot be confident that inflation is moving gently toward 2%," pointing out that "inflation numbers have decreased, but this is partly due to a reversal of the price surges during the COVID-19 period caused by increased demand and supply shortages." He criticized that "housing cost inflation remains above historical levels," and "service inflation is the same." Barkin, classified as a centrist, will have voting rights at the FOMC starting next year.

These remarks from Fed officials came immediately after the release of the October CPI report, which showed a slower increase than expected. According to the U.S. Department of Labor, the October CPI rose 3.2% year-over-year. This was a significant slowdown from the previous month's increase of 3.7%, and also below the 3.3% forecast compiled by Dow Jones experts. The October CPI was flat month-over-month, falling short of both the 0.4% increase in September and the market expectation of 0.1%.

The market immediately cheered. Expectations that the Fed would no longer raise rates further strengthened, leading to a sharp drop in Treasury yields. According to the Chicago Mercantile Exchange (CME) FedWatch, as of that day, the federal funds futures market reflected a 99.8% probability that the Fed would hold rates steady at 5.25-5.5% at the next meeting. This hold expectation had risen from the 85% range the previous day and briefly hit 100% after the CPI release that morning.

Moreover, expectations for rate cuts next year also grew stronger. Before the CPI release, the prevailing scenario was a pivot starting in June next year with a total of three rate cuts, but bets expanded that four cuts would be made starting as early as May. Bryce Doty of Sit Fixed Income Advisors diagnosed, "The Fed’s next move is more likely to be a rate cut next summer rather than another rate hike." Oscar Munoz, U.S. chief macro strategist at TD Securities, said, "Everything is good news for the Fed," adding, "They will continue to keep the possibility of another rate hike open, but the market will not accept it," effectively concluding that the tightening cycle has ended.

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The key question is whether this disinflation trend will extend to still-hot service and housing cost inflation. Despite accumulated tightening, the still-strong economy and labor market are considered factors that could potentially reignite inflation. Geopolitical risks from the Middle East also increase uncertainty around oil prices. Goolsby said, "Whether the Fed achieves the 2% price stability target depends on housing cost inflation," adding, "We have seen the start of disinflation, but for it to work, it must continue," showing a cautious stance. The Fed is expected to continue its careful approach, maintaining a hawkish option to raise rates if necessary, rather than prematurely signaling the end of the tightening cycle, to avoid repeating past mistakes of inflation rebounds.

James Bullard, a prominent hawk (favoring monetary tightening) and former president of the St. Louis Federal Reserve Bank, also warned of inflation rebound risks that day. In an interview with CNBC, he said, "There is a very high possibility that the (easing) inflation trend will reverse and go down the wrong path," emphasizing, "The good disinflation we have seen over the past 12 months may not continue, which remains a risk for the FOMC. They need to do more."

Kenneth Griffin, founder and CEO of the large hedge fund Citadel, does not expect the Fed to raise rates further but pointed out, "The Fed needs to send a message that it will put the 'inflation genie' back in the bottle. Cutting rates too quickly risks losing credibility on the 2% target commitment." The Fed is scheduled to update its rate outlook with a new dot plot at the final FOMC meeting of the year in December.

This content was produced with the assistance of AI translation services.