Wall Street's view has shifted to no more rate rises and a potential rate cut sooner than expected. This change comes after a sharp decline in oil and petrol prices, causing US inflation to resume its downward trend in October, marking the first decrease in three months.
In October, US consumer prices increased by 3.2% year-on-year, down from the 3.7% annual rate in September. This rate was slightly lower than economists' forecasts, and prices remained flat month-on-month. As a result, there was a significant rally in equities and bonds, with the yield on the key 10-year security dropping to a six-week low of 4.43% from Monday's close at 4.63%.
The news also led to a sell-off in the value of the US dollar, causing the Australian dollar to surpass 65 US cents in trading. The 10-year yield has fallen over 56 points (0.56%) since its peak just above 5% in mid-October, dispelling pessimistic media and analyst forecasts about the coming year.
Excluding volatile food and energy prices, the core CPI rose by 0.2%, falling short of the forecasted 0.3%, and the annual rate was the smallest increase since September 2021.
The flat reading on the headline CPI was due to a 2.5% decline in energy prices for the month, offset by a 0.3% increase in food prices. Shelter costs, a notoriously volatile component of the US CPI, rose by only 0.3% last month, half of the 0.6% increase in September. US airfares fell nearly 1%, and car rental costs dropped by 1.5%. Used car prices have dropped for a fifth consecutive month in October, plummeting by 7% from a year ago. These prices were a significant driver of the increases seen during the pandemic years when a shortage of computer chips and other components disrupted the supply of new vehicles.
Economists have immediately ruled out any further rate increases from the Federal Reserve, praising the Fed for effectively ending its tightening cycle as inflation continues to slow.
"The inflation fever has broken," said Bill Adams, chief economist at Comerica Bank, noting that rising petroleum production is keeping gas prices in check, house prices are rising more slowly after mortgage rates surged in 2023, and rents are also increasing more gradually as more apartment buildings are completed.
The 'dot plot' issued after the September Fed meeting, which shows where members of the Open Market Committee anticipate interest rates heading in the short and medium term, originally included one more rate rise for 2023 with two rate cuts scheduled for the following year instead of the previous projection of four in June. Some economists suggest that the US central bank could initiate these rate cuts earlier, but others remain cautious.
Federal Reserve Chair Jay Powell's recent remarks on monetary policy were not optimistic, and he may have had some insight from the Fed's research on easing inflation levels.