Almost 100%! Wall Street is convinced that the Fed will cut interest rates next week.

Although the decline of CPI inflation in the United States stagnated in November, this may not prevent the Federal Reserve from cutting interest rates next week.

On Thursday, it is widely expected that the Fed will announce a rate cut at the FOMC meeting next week. At present, the federal funds futures market shows that almost 100% of Fed officials will choose to cut interest rates by 25 basis points again at the FOMC meeting on December 17-18.

It is worth mentioning that this expectation is not based on the latest inflation, but on the trend of the overall economic situation.

From July 2023 to September 2024, the Federal Reserve raised interest rates and maintained them at 5.25% to 5.50%. At that time, the economic environment was very different from now. Although inflation has not yet reached the Fed's target of 2%, it has dropped significantly from the peak and the employment situation has stabilized. Fed officials also tend to cut interest rates further to normalize policies and avoid restricting economic growth or worsening employment.

At the same time, media analysis reminds us not to be surprised by the forward-looking guidance issued by the Federal Reserve after next week's interest rate cut. The Federal Reserve may carefully consider the pace of subsequent interest rate cuts. They may hint that it will suspend interest rate cuts at the beginning of the year and reduce the number of interest rate cuts in 2025.

The Fed will not deviate from the interest rate cut route in December and should be optimistic about the downward trend of inflation.

Overnight, data released by the Bureau of Labor Statistics showed that the CPI of the United States increased by 0.3% in November, up from 0.2% in October, the highest level since April this year. However, it increased by 2.7% year-on-year, which was in line with expectations. More importantly, core inflation excluding food and energy remained stable. In November, the core CPI rose by 0.3% month-on-month, which was the same as the increase since August.

Tuan Nguyen, an economist at RSM US, said:

The Fed will not deviate from the route of cutting interest rates in December, which is generally expected by the market. Considering that the seasonal factors in the inflation report may fade in the coming months, this is a reasonable short-term decision.

The analysis believes that there is reason to be optimistic about the resumption of the downward track of inflation. In November, the price of used cars and hotels increased significantly, but industry data did not show that this increase would continue. In addition, there has been a positive change in housing inflation, and the rental price and the owner's equivalent rent only rose by 0.2% in November, hitting a cyclical low.

Neil Dutta, head of economic research at RenMac, pointed out:

The normalization of housing rent inflation will help the overall inflation return to the target of 2%, which is the biggest gap compared with the Fed's target. In November, the overall housing inflation rose by 0.3% month-on-month.

Recently, many Fed officials pointed out that the United States has made great progress in reducing the overall inflation rate, and the labor market has also returned to normal levels. Marie í Dali, president of the San Francisco Fed, explained last week that monetary policy should not be as tight as it was in the past two years, because inflation is no longer far from the 2% target as in the past, and the labor market tends to be balanced.

Federal Reserve Governor Waller also said last week that he was inclined to cut interest rates further at the FOMC meeting in December. Although the recent rebound in inflation has raised concerns that price growth may stagnate above the Fed's 2% target, he said he did not want to overreact.

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