Cooling US inflation points to the Fed holding steady
At a Glance
The desk believes that recent cooling in US inflation, particularly following a disappointing July jobs report, will likely lead to the Federal Reserve maintaining its current interest rate policy for an extended period. Per the full note , July saw core inflation decline to an annualized rate of 2.5%, with 3M annualized core inflation dipping even lower to 1.6%. This shift reduces the urgency for hawkish moves from the Fed, especially as market participants brace for upcoming data releases and the Jackson Hole symposium later this month.
Key Takeaways
- 01Cooling inflation data reduces pressure on the Fed for immediate rate hikes.
- 02Core inflation registers at 2.5%, signaling a softer economic backdrop.
- 03Market expectations are adjusting, with significant upcoming employment and inflation data on the horizon.
- 04The upcoming Jackson Hole symposium may further steer market sentiment regarding Fed actions.
Full Analysis
What the desk is arguing
The desk interprets the latest inflation data as a strong signal that the Federal Reserve may pause any further rate hikes, affirming a shift in market sentiment. Following July's benign inflation report, which revealed core inflation steady at 2.5% versus 2.6% in the prior month, expectations for tightening have considerably eased.
With monthly core CPI rising only 0.2% and headline inflation increasing by 0.1%, this ongoing trend of disinflation keeps the Fed's rate hike trajectory in check. Analysts now anticipate that the inflation environment, particularly with subdued gasoline and shelter prices, suggests a prolonged hold on rates, especially in light of another jobs report and inflation print due before the FOMC meeting on September 16.
Where it sits in our coverage
Our consensus target for USD/EUR is currently set at 1.075, bounded by a range of 1.04 to 1.12. Specific firm forecasts include: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
Given the current outlook, the desk's call aligns closely with the lower end of the spectrum but is more optimistic compared to BofA's bearish stance.
How other firms see it
Firms such as JPMorgan and others are aligned in their expectations for Fed policy to remain dovish, reflecting a consensus view pointing toward sustained rates. Conversely, BofA presents a contrary stance, suggesting a potential for earlier rate hikes than the market expects.
As inflation and employment reports continue to unfold, positive trends in USD may reveal more about broader market positioning, particularly in regards to US Treasury yields and the carry trade dynamics in the FX space.
Market Implications
Traders should closely monitor the USD/EUR pair around the 1.07 level, as any significant deviations in upcoming inflation or jobs data could provoke volatility. The Jackson Hole symposium is anticipated to serve as a critical directional cue for Fed policy expectations leading into the September FOMC meeting.
From the original
Articles Cooling US inflation points to the Fed holding steady Published 14:25 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Another benign inflation report following hot on the heels of a poor July jobs report has seen markets increas
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4 itemsWhy we don’t think the Fed will hike rates
The desk believes the Federal Reserve is unlikely to hike rates based on the diverging perspectives within the FOMC and a favorable inflation outlook over the next year. Per the full note by James Knightley, the Fed's dual mandate of maximizing employment and maintaining price stability requires a cautious approach, especially given the current softness in job creation and the housing market. Despite a hawkish tone from half of the FOMC members, the remaining members' skepticism coupled with improving inflation metrics supports our stance for a lengthy pause in rate hikes. The consensus within the market is significantly swayed by these internal dynamics as investors currently anticipate a 25 basis point hike by October 2026 but our position emerges firmly on the side of inaction.
Softer-than-feared US inflation despite robust spending
The desk interprets the recent US inflation data as a noteworthy pivot point that dampens immediate rate hike expectations, supporting the view held by NY Fed President John Williams that further tightening is not urgent. Recent figures show the core PCE deflator at 0.2% month-on-month for August, below forecasts of 0.3%, which along with downward revisions to the previous month, indicates a more favorable outlook on inflation trends. Per the full note [source], this data shift could temporarily ease pressure on the Fed to act, with markets pricing in only 9 basis points for the upcoming October FOMC meeting compared to 18 basis points prior to the report.