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Cooling Inflation Suggests Fed is Done


November 21, 2023 


Consumers have had a tough few years navigating rising prices as the economy recovered from the pandemic-induced recession. But, last week’s inflation data revealed that the Fed’s aggressive efforts to get inflation under control are working. 


The Consumer Price Index (CPI) has fallen from an annual rate of 9.1% in June 2022 – a level not seen since the early 1980s – to 3.2% in October. The data was better than the expected 3.3% forecast and 3.7% seen in the prior month. Core CPI fell to 4% year over year, the lowest since September 2021.


The decline in prices was widespread. The price of shelter, which has been stubbornly high, fell from 7.1% to 6.7% year over year. Auto prices fell to 1.9% from a year ago, the lowest since March 2021. Food and energy prices, often the most volatile, fell to 3.3% and -4.5%, respectively.  


The softer-than-expected inflation data was welcome news for both stocks and bonds, helping to support the narrative that the Fed is done tightening. Now the question has become: When might the Fed begin cutting rates?  Since price declines haven’t been in a straight line, the Fed will want to be certain that inflation doesn’t return. Therefore, we expect the central bank will remain vigilant and data dependent. 


Still, we believe the Fed is at the end of its tightening cycle. However, in our view, the futures market’s expectation that the Fed could begin cutting rates as early as March is too optimistic. While growth is likely to slow over the coming quarters, we do not anticipate the Fed to pivot to rate cuts until the second half of 2024. 


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