"US Inflation Still High in Sept, May Reduce Future Fed Rate Cuts"

The U.S. inflation data for September exceeded expectations, with inflation still high, suggesting that the Federal Reserve may reduce the magnitude of future rate cuts.

The "chronic disease" of U.S. inflation has begun to cause discomfort once again. The September CPI data has been released, showing a year-on-year increase of 2.4%, with core CPI up by 3.3% year-on-year. On the surface, it appears to be a moderate decline, but in reality, there are undercurrents at play, far exceeding market expectations. This is akin to a patient who seems to have a fever that has subsided; the thermometer reading has dropped slightly, but the inflammation still lurks within, ready to flare up again at any moment.

The Federal Reserve, the "old Chinese medicine practitioner" controlling the lifelines of the U.S. economy, is facing a difficult choice. The previous aggressive interest rate hikes, like a strong medicine to cure a severe illness, have temporarily suppressed inflation but also brought the risk of economic recession. The market had expected the Federal Reserve to increase the magnitude of rate cuts to "infuse" the economy, but the unexpectedly strong September non-farm employment data, coupled with inflation figures higher than anticipated, undoubtedly threw a bucket of cold water on the Federal Reserve.

The market reaction is intriguing. U.S. stocks, bonds, the dollar, and gold, these "barometers" of the financial markets, remained calm after the data was announced, as if they had already anticipated this "unexpected" outcome. This may suggest that the market is still filled with confusion and uncertainty about the direction of the U.S. economy.

Under the illusion of "fever reduction" for inflation, there are hidden worries.

On the surface, the decline in energy prices has played a certain role in curbing inflation, but this is more like drinking poison to quench thirst. As pointed out by the team led by Xiong Yuan, the chief economist of Guosheng Securities, the widespread rebound in the prices of core goods and services is the crux of the difficult-to-treat U.S. inflation. This is similar to a person with a chronic illness who temporarily alleviates the pain with painkillers, but the root cause of the illness still exists.

What is even more worrying is the tense geopolitical situation in the Middle East, like a bomb that could detonate at any time, pushing oil prices to the forefront. The International Energy Agency (IEA) pointed out in its October oil market report that the geopolitical risk premium has increased significantly, which could further push up oil prices. This undoubtedly adds fuel to the fire of U.S. inflation, putting it at risk of re-emerging.

The Federal Reserve's "Dilemma"

The Federal Reserve is now like a tightrope walker, needing to control the "beast" of inflation while preventing the economy from falling into the "abyss" of recession. If interest rates are raised too aggressively, the economy may not be able to withstand it; if rates are cut too quickly, inflation may make a comeback.

The Federal Reserve Watch tool from the Chicago Mercantile Exchange shows that the market's expectation for a 25 basis point rate cut in November has risen significantly. This indicates that the market believes the Federal Reserve may adopt a more cautious strategy, gradually exiting from tight monetary policy.However, the macroeconomic team at Open Source Securities holds a more pessimistic view, suggesting that the downward trend in U.S. inflation may enter a stagnation period. The market and the Federal Reserve's focus on inflation will gradually increase, and the decision-making pressure on the Federal Reserve will also significantly rise. This is akin to a doctor facing a patient with a complex condition, who dares not hastily increase the dosage of medication, yet fears the worsening of the condition, and can only cautiously adjust the treatment plan.

The "Butterfly Effect" of the Global Economy

The direction of U.S. inflation not only affects the U.S. economy but also tugs at the nerves of the global economy. As Qin Tai, the Chief Macro Analyst at Huajin Securities, stated, the unexpected performance of U.S. inflation and the job market may force other economies to adopt more aggressive monetary policies, thereby triggering turmoil in the global financial markets.

Imagine if the U.S. dollar continues to strengthen, currencies of emerging market countries will face depreciation pressures, and the risk of capital outflow will increase, which could deal a heavy blow to these countries' economies. This is like a domino effect, where the collapse of one link may trigger the collapse of the entire chain.

The Path Ahead: Shrouded in Fog

Looking ahead, the direction of U.S. inflation remains full of uncertainty. Geopolitical risks, a slowdown in the global economy, and supply chain disruptions could all impact inflation. Whether the Federal Reserve can find a balance between controlling inflation and stabilizing the economy is still a huge challenge.

A research report from the Peterson Institute for International Economics points out that the global economy faces increased downward risks, which could lead to further rising inflationary pressures. This undoubtedly casts a shadow over the future.

We cannot help but ask: When will the "chronic disease" of U.S. inflation be cured? How will the Federal Reserve respond to future challenges? Where will the global economy head? These questions may only be answered by time.