As the slowdown in U.S. inflation becomes clear, market expectations for an interest rate cut by the U.S. Federal Reserve next year are rising. On the 30th of last month (local time), the Dow Jones Industrial Average, comprised of key U.S. companies, hit its highest point in 22 months, reflecting these expectations.
On this day, the U.S. Department of Commerce announced that the personal consumption expenditures (PCE) price index increase rate in October, the Federal Reserve’s preferred price index, recorded 3.0% compared to the previous year. This is the lowest level since March 2021, when U.S. prices were rising. The core PCE price index, which the Federal Reserve uses as a standard for determining its inflation policy target of 2%, also rose 3.5% compared to the previous year, meeting market expectations. Core prices are the price index excluding the highly volatile food and energy sectors. The core PCE price index increase rate has been steadily declining from 4.3% in July and 3.8% in August to 3.7% in September and 3.5% in October.
As the slowdown in inflation becomes clear, as the Federal Reserve hopes, it is highly likely that the Federal Reserve will freeze interest rates at the Federal Open Market Committee (FOMC) held on December 12th and 13th. According to FedWatch of the Chicago Mercantile Exchange, which reflects the Federal Reserve’s policy path through interest rate futures trading, after the announcement of the PCE price index today, investors put the probability of interest rates frozen in December at about 96% and the probability of an interest rate cut starting in May next year at about 80%. I am fortune telling. Just a month ago, the possibility of a May cut was only around 40%. Wall Street financial companies such as Bank of America and Deutsche Bank are predicting an interest rate cut in June. Attention is focused on whether the dot plot to be released after the December FOMC meeting suggests the possibility of a cut.
Due to expectations of an interest rate cut, the Dow rose 1.47% compared to the previous day, breaking a new record. If calculated as a month in November, it soared 8.8%. In October, concerns about a prolonged period of high interest rates from the Federal Reserve and fears of a surge in government bond yields swept the market, but in November, earnings surprises from major U.S. companies and signals of slowing inflation continued. The Standard & Poor’s (S&P) 500 index, centered on large-cap stocks, and the Nasdaq index, centered on technology stocks, also showed increases of 8.9% and 10.7%, respectively, in the month of November, supporting optimism as the market emerged from the U.S. Treasury shock in October.
Meanwhile, consumption, which has supported the U.S. economy, appears to have declined sharply in October. The growth rate of consumer spending in October was 0.2% compared to the previous month, showing a clear slowdown compared to September (0.7%). As the impact of the Federal Reserve’s high-intensity tightening continues and the effectiveness of government subsidies declines, it appears that it is beginning to affect the spending ability of American consumers.
The Wall Street Journal (WSJ) said, “It is too early to predict exactly when the Federal Reserve will start lowering interest rates,” but added, “The simple fact that an environment has been created in which the Federal Reserve can more comfortably lower interest rates if problems arise (in the economy) “It has important meaning,” he said.
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Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.