Will the Fed Cut Rates With Inflation Rising?

Key Concepts

• Federal Reserve (Fed)
• Fed meeting
• Inflation dashboard (Cleveland Fed)
• Month-over-month inflation readings
• Year-over-year inflation readings
• Seasonality and base effects
• Annualized inflation
• Fed rate cut
• Market pricing of rate cuts

Inflation Outlook and Fed Policy

The discussion centers on the potential market reaction leading up to the Federal Reserve's upcoming meeting and what the Fed's communication might entail regarding inflation. A key focus is the Cleveland Fed's inflation dashboard, with an emphasis on month-over-month (MoM) inflation readings. The speaker notes that MoM readings are preferred over year-over-year (YoY) figures because YoY data can be distorted by seasonality or base effects.

Key Points on Inflation:

• MoM Readings Warming Up: The MoM inflation readings have shown a marginal increase as of November and December.
• Deviation from 0.2%: These readings are moving further away from the 0.2% mark.
• Annualized Inflation Implications: Even at 0.2% MoM, the annualized inflation rate is above 2%.
• Current Readings and Headline Inflation: With current MoM readings in the 0.25% to 0.27% range, headline inflation is trending closer to a 3% YoY rate.

Market Expectations and Potential Concerns

The conversation then shifts to market expectations for Fed rate cuts in the coming year. The market currently has three rate cuts priced in for next year. The speaker raises a concern about the potential for a Fed rate cut next week, questioning whether this scenario could lead to market uncertainty.

Key Argument:

• Potential for Concern: Even if a rate cut is delivered, there might be a lack of full clarity on the Fed's future policy path. This uncertainty could be a source of concern for the market, despite the delivery of a cut.

Logical Connections and Synthesis

The discussion logically connects the observed inflation trends (warming MoM readings) to the Federal Reserve's potential policy response (rate cuts). The speaker uses the Cleveland Fed's inflation dashboard as a specific data source to support the observation of rising inflation. This inflation data then serves as a backdrop for analyzing market expectations regarding Fed rate cuts. The core concern is that the market's pricing of three rate cuts might be at odds with a Fed that is signaling a less dovish stance due to the observed inflation uptick, leading to potential market volatility if clarity is lacking.

Conclusion

The main takeaway is that while the market anticipates multiple Fed rate cuts in the next year, recent marginal increases in month-over-month inflation, as indicated by the Cleveland Fed's dashboard, could create uncertainty. Even if a rate cut occurs, the Federal Reserve's forward guidance might not fully align with market expectations, potentially leading to market apprehension. The focus on MoM inflation readings highlights a preference for more current and less seasonally influenced data when assessing inflationary pressures.