Following today's inflation data, traders of short-term interest-rate futures contracts adjusted their expectations to now see a heightened probability of an additional quarter-point interest rate cut by the Federal Reserve in its December meeting.
The likelihood of a Fed rate cut to the 4.25%-4.5% range in December has increased to 80%, a significant rise from the roughly 60% chance priced in prior to the inflation data release.
Furthermore, traders anticipate a deceleration in the pace of rate reductions for the following year, with expectations that the Fed will pause rate cuts once the policy rate reaches the 3.75%-4% range.
“Barring any surprises in upcoming data, we expect another 25 basis points of Fed rate cuts in December and further easing in 2025," said Solita Marcelli, Chief Investment Officer Americas, UBS Global Wealth Management .
"Investors should shift excess cash into quality fixed income or consider diversified fixed income strategies as a way to enhance portfolio income. We also see US equities as Attractive amid solid economic growth, Fed easing, and robust AI investment.”
The U.S. Labor Department's data indicated a slight acceleration in headline inflation for October, an outcome that was anticipated and is expected to be scrutinized by the Federal Reserve as it approaches its next policy meeting.
The consumer price index (CPI), a critical indicator of price movements in the world's largest economy, climbed by 2.6% year-over-year in October, a slight increase from 2.4% in September. On a month-to-month basis, the CPI rose by 0.2%, consistent with the previous month's increase.
Excluding the more volatile components such as food and energy, the "core" CPI measure saw a 3.3% increase from the previous year and a 0.3% rise month-over-month, mirroring the figures recorded in September.
The Federal Reserve's most recent action, last week, involved a widely expected cut in borrowing costs by 25 basis points, bringing the rate to a range of 4.50% to 4.75%.
The central bank acknowledged that inflation remains "somewhat elevated," but it assessed that the risks to maintaining stable price growth and a robust employment market were "roughly in balance."