top of page

October's inflation data is a signal for potential rate cuts

The recent inflation data released for the month of October showed that inflation started to nosedive again. This is obviously something positive for the economy because cooling inflation means the people’s purchasing power is increasing again.

Indeed, October's inflation data suggests that the Federal Reserve (Fed) may be nearing the end of its rate-hiking cycle. The Consumer Price Index (CPI) rose 3.2% in October, down from 3.7% in September, and core CPI, which excludes food and energy prices, rose 4.0%, down from 4.2% in September. These softer-than-expected readings suggest that inflation is starting to moderate, which could allow the Fed to pause or even reverse its rate-hiking policy.

The CPI fell in October, and the core CPI also slowed. This suggests that the Fed's rate hikes have been having an impact on inflation. Moreover, the economy was expected to grow at a slower pace in 2023, which could help to further tame inflation. And the unemployment rate is up slightly, and wage growth has slowed. This suggests that the labor market is cooling, which could help to keep inflation in check.

In order to cut interest rates, the Federal Reserve will consider the future path of inflation, the health of the national economy, and the impact of the global economy. Since the Fed had raised interest rates, inflation has been declining consistently all the way to 3% on average from 9% in October 2021. Between July and September, inflation slightly rose but not to a level where interest rates had to be significantly hiked again. During these two months of slight inflation increase, interest rates remained high but unchanged.

The central bank has been very cautious about not increasing interest rates to a point where it could trigger a recession. The Federal Reserve was aiming for a soft landing. As a result, the Fed is now signaling that it may be nearing the end of its rate-hiking cycle. The October 2023 inflation data, which showed that inflation is moderating, was a positive sign for the Fed.

According to Bankrate’s Economic Indicator poll for the third quarter, 94% of economists say that the central bank could begin cutting interest rates in 2024. Markets broadly anticipate a 1% decline in the Fed funds rate to between 4% and 5% by the end of 2024. According to Bloomberg, UBS Investment Bank strategists expect the benchmark federal funds rate to fall to between 2.5% and 2.75% by the end of 2024. The Federal Reserve will cut interest rates by 275 basis points next year, nearly four times more than what markets are pricing.

A continued decline in inflation will enable the central bank to start implementing quantitative easing. In doing so, the central bank will start again buying government bonds in exchange for providing liquidity in the economy. This is supposed to then boost consumer spending and stimulate economic growth. But the question to ask is how much will the central bank cut interest rates?

The level to which rates will be cut will necessarily determine the level of the money supply. If the central bank cuts interest rates drastically, as the UBS strategists predict, then the amount of money injected into the economy could exceed the level of goods and services produced, thus triggering inflation again and economic instability.

There is no one-size-fits-all answer to the question of whether or not to cut interest rates. The best decision for the economy will vary depending on the specific circumstances.


Rated 0 out of 5 stars.
No ratings yet

Add a rating

Subscribe to The Lake Street Review!

Join our email list and get access to specials deals exclusive to our subscribers.

Thanks for submitting!

bottom of page