October CPI Inflation: Just What the Dr. Recommended

Chief Economist Eugenio J. Alemán discusses current economic conditions.

October news on CPI inflation was all the doctor recommended and has markets spinning and repricing the Federal Reserve’s (Fed) potential path forward. That is, markets are already assuming that the Fed is closer to lowering interest rates than what they feared just a month ago when the yield on the 10-year Treasury briefly surpassed 5.0%. Since then, yields have moved back down to about 4.5% and continue to trend lower.

The market expects (at 100%, according to the CME FedWatch tool) the Fed to be done increasing interest rates this year and are already pricing in lower rates starting in May of 2024. But as we have said previously, what is happening, once again, is just the opposite of what Fed officials would like to see and underscores Fed Chairman’s Powell argument during the press conference after the November Federal Open Market Committee (FOMC) decision to keep interest rates unchanged that the institution was not confident of having done enough to keep inflation on a downward trajectory.

The Fed Chairman is probably trying to be very cautious as experience has shown that if the Fed relaxes monetary policy too soon or too fast, the probability that inflation starts to move higher again, as happened during the 1960s, 1970s and early 1980s, could come back and haunt them, and it is not willing to risk going that route again. This is the reason why the Fed has been very clear that it expects to keep interest rates higher for longer.

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