Market Expectations for Fed's Interest Rate Policy Before CPI Release

Summary

Before the CPI release, CME’s FedWatch indicates a 26.6% probability of a 25 basis point rate cut by the Fed in January, with a 73.4% chance of rates remaining unchanged. By March, the probability of a cumulative 25 basis point cut is 45.8%, with a 43.2% chance of no change, and a 10.9% chance of a 50 basis point cut.Zhitong

Impact Analysis

So, the market’s basically in a holding pattern with the Fed, expecting them to keep rates steady in January, with a 73.4% probability of no change. This cautious stance is largely due to the unreliable nature of the upcoming CPI data, affected by the government shutdown, which has dampened its impact on market expectations. The CPI came in lower than expected at 2.7% year-over-year, below the anticipated 3.1%, which has increased the likelihood of a rate cut in January. However, the Fed’s focus seems to be shifting more towards the labor market’s weakness rather than inflation alone. This could mean that even with lower CPI, the Fed might not rush into cutting rates unless there’s a significant deterioration in employment data. For the portfolio, this suggests a potential opportunity in bonds, as lower CPI and rate cut expectations could drive yields down further. Keep an eye on the labor market data for any shifts in Fed policy direction.