Federal Reserve Rate Cut Speculations

On Friday, analysts from Alpine Macro suggested that the Federal Reserve might pause or implement a modest 25 basis points (bps) rate cut at the upcoming November meeting. This follows the release of September's U.S. Consumer Price Index (CPI) data.

The futures market currently anticipates a total of 50 bps in cuts by the end of 2024; however, Alpine Macro indicates that the rationale behind such significant cuts has weakened.

The September CPI reported a headline inflation rate of 2.4% year-on-year, slightly down from August's 2.5%. Despite this, Alpine Macro emphasized that the underlying data no longer supports a rapid decrease in inflation. They stated, "Inflation data is no longer falling rapidly—or even at all," suggesting that aggressive Fed actions are unlikely.

Reflecting on the previous 50 bps cut in September, analysts highlighted that it stemmed from fears of inflation undershooting the Fed's target. At that time, data indicated an increasing risk of inflation falling below the desired levels, driving a necessary "recalibration" of rates from the bond market's perspective.

Yet, data on inflation and growth since then have diminished the case for substantial new rate cuts. Although the CPI appeared manageable, Alpine Macro cautioned that the 12-month CPI figure does not provide a complete picture.

Given the current economic landscape, they predict a more cautious Fed approach moving forward. With only marginal impacts of downside risks to growth and employment on decision-making, they concluded, "another -50bp cut is off the table. The question now is whether the Fed will cut by -25bp or decide not to cut at all."