Fast reading
- US inflation rose to 2.6% in October up from 2.4% the previous month, while considerably down from a peak of 9.1% in mid-2022, it remains stubbornly above the Fed’s 2% target.
- The Republican party secured the House of Representatives this week giving it the much-coveted trifecta – alongside the Senate and the presidency – and affording the GOP a certain amount of freedom when it comes to advancing its fiscal policies. Stronger economic growth may cause the Fed to rethink its plans.
US inflation crept slightly higher in October for the first time since March leading many investors to question whether the uptick in prices could impact the US Federal Reserve’s rate-cutting plans as it prepares for the new US administration to take charge in January.
Consumer prices rose 2.6% over the 12 months to October, up from the 2.4% figure recorded for the 12 months to September1. The Department of Labor noted the overall increase was broadly driven by rising housing and food costs.
Figure 1: Inflation decline hits another road bump
This latest development will be watched closely by the Fed as it debates whether to cut the benchmark rate again before the end of the year.
“Last year’s decline in inflation has seemingly stalled, economic growth has rebounded, and October’s disastrous labour-market report – largely due to a pair of extreme hurricanes and two since-settled strikes – may be revised away in coming months. Consequently, there is now some uncertainty regarding the pace of the Fed’s ongoing rate-cutting plans,” says Phil Orlando, Chief Market Strategist, Federated Hermes.
A bumpy path
Inflation has fallen substantially from a peak of 9.1% in June 20222, but remains stubbornly above the US central bank’s 2% target. Fed Chair Jerome Powell has previously stated that should the data suggest inflation is no longer sustainably moving towards 2%, the pace of rate cuts may slow.
The Fed cut rates for the first time in four years in September, slashing the benchmark rate by 50 basis points (bps)3. Economic forecasts released after the announcement suggested a further 50bps of cuts could be on the cards before the end of the year4.
A further 25bps cut was announced last week, taking the federal funds rate target range to 4.5-4.75%. However, it is now less clear whether the Fed will press ahead with another 25bps reduction at its next meeting on 17-18 December. A pause at this juncture would kick the can down the road into a new year and a new administration.
Trump trade
It was confirmed this week that Republicans have secured the House of Representatives – alongside the Senate and the presidency – affording the GOP a certain amount of freedom when it comes to advancing its legislative agenda. Change is coming to Washington and the central bank will be paying close attention to this new development as well. Particularly if the Trump trifecta leads to stimulative fiscal policies that result in stronger economic growth.
“The Republican sweep in the US election could have wide-reaching implications for the stock markets, currencies, commodities and foreign countries. In the long run, Trump’s agenda of deregulation and lower taxes is pro-business and, in the nearer term, we expect smaller caps and value to be favoured,” says Paul Dalton, Investment Director for Equities, Federated Hermes Limited.
The Republican sweep in the US election could have wide-reaching implications for the stock markets, currencies, commodities and foreign countries
“However, we should not expect a smooth ride. Trump’s ‘America First’ policies could increase global trade tensions, especially with China and potentially the EU. Moreover, the fiscal deficit, policy unpredictability and his geopolitical stance on Russia and the Middle East could have a major impact on energy markets, military spending and traditional alliances.”
Orlando adds that at last week’s Federal Open Market Committee (FOMC) meeting, Powell was evasive when asked how President-elect Trump’s fiscal policies – if they eventually pass through Congress into law – might spur stronger economic growth. “Central banks both in the US and abroad will be watching intently at the first half of Trump’s lame-duck term to glean any clues to adjust monetary policy accordingly,” Orlando says.
Please see our Liquidity webcast Q4 2024 for further insights on implications of the November Federal Reserve meeting and the outlook for money market investors.
Share:
1 Source: US Bureau of Labor Statistics
2 Source: US Bureau of Labor Statistics
3 Source: Federal Reserve
4 Source: Federal Open Market Committee – Summary of Economic Projections
BD014956
