The 2024 interest rate meeting is about to come to an end. What are the current expectations for interest rate cuts in the United States?

With the release of the previous data, the expectations for the last Federal Reserve interest rate meeting in December 2024, 2024, have begun to become clear.

On December 11, Eastern Time, the United States released the latest CPI data for November 2024. Its overall inflation rebounded, and core inflation was relatively stable. On December 6, the U.S. Department of Labor released the U.S. non-agricultural employment data for November, showing that the U.S. unemployment rate rose slightly after the election. With the confluence of the two data, the market's expectations for the Federal Reserve's interest rate cut in December have increased.

With the results of the U.S. election, the impact of Trump's coming to power has gradually begun to affect the direction of the U.S. market. Among them, the question of whether his policy will conflict with the Fed's interest rate cut cycle is of great concern. How will the recent US economic data affect the December interest rate meeting? And what impact will Trump's policies have on subsequent interest rate meetings? This article will analyze this.

Core inflation has not shown a rebound trend, supporting confidence in the decision to cut interest rates

The US CPI rose 2.7% year-on-year in November and 0.3% month-on-month from October; the core CPI rose 3.3% year-on-year and 0.3% month-on-month, and the year-on-year and month-on-month growth rates were basically the same as in October. After the inflation index continued to decline from April to September, the inflation released by the Federal Reserve rebounded for two consecutive months. Focusing on the details, its core inflation project showed a relatively obvious stubbornness, but there was not much momentum for recovery.

Specifically, the stickiness of inflation in the United States since 2021 is mainly composed of core services. Expenses related to "living and traveling" such as housing, medical care, education, insurance, and transportation services are expenses that American residents or residents of most countries need to face. These expenses have risen significantly during the epidemic, but have not been effectively reduced after the epidemic, constituting the current stubborn inflation item in the United States.

But looking at November alone, the month-on-month changes in core services in the United States in that month were mainly downward, with rent and transportation services both experiencing a slight decline. Although school accommodation and hotel accommodation have rebounded significantly, their proportion weight is already low, and their overall impact is relatively limited. The aviation service sub-item, which has experienced large fluctuations in the past two months, has also come to a temporary end with the end of the Boeing strike.

On the other hand, the rebound in inflation in November is related to food and energy prices. The two share the positive contribution to the growth rate of inflation. The energy item rose by 0.22pct month-on-month, while food prices rose by 0.23pct month-on-month. Considering the seasonal impact of stabilization and cooling and the approaching Christmas, the relevant fluctuations are normal.

Overall, US inflation data in November did not get better, but it did not get worse. Although the stickiness of the core inflation item remains solid, the rapid rebound in inflation that the market is worried about seems unlikely at present, which makes the market more confident in the Fed's decision to cut interest rates in December.

Employment data is mixed, and the disturbance of the event gradually subsides

In terms of employment data, November's US non-farm data can be described as "mixed". In November, the number of new non-farm employment was 220,000, higher than the expected 200,000, and the previous value was revised to 36,000; the overall unemployment rate was 4.2%, also higher than the previous value and the expected value of 4.1%; the overall labor participation rate fell to 62.5%, lower than the expected 67.7% and the previous value of 62.6%; the growth rate of new non-farm employment was 4.0%, higher than the market expectation of 3.9%.

From the perspective of employed population, non-agricultural employment in November can be said to have rebounded sharply, but the main reason is the "natural disasters and man-made disasters" on the non-agricultural employment side of the United States in October. The consecutive hurricanes in the United States in October and the strike at Boeing significantly reduced the number of new employed people, and the rebound in November was mainly caused by the return of these temporarily unemployed people to the market. Among them, education, medical care and government departments contributed 112,000 to the new employment data, accounting for 49% of the total new employment.

In addition to the employed population, the slight increase in the unemployment rate and the decline in the labor participation rate are the "bad" part of market expectations. The number of newly unemployed people in November rose to 160,000, a further increase from the previous value of 150,000. Judging from Trump's speech after he took office in November, the rise in unemployment may be related to his plan to tighten immigration and government spending policies.

Although it seems that it is difficult to expel undocumented immigrants in the country, tightening the border and reducing the net inflow of immigrants is expected to be effective. For the US job market, there are many illegal immigrants among the practitioners in industries such as tourism, hotels, and warehousing services. With the implementation of Trump's policies in 2025, it may further cause fluctuations in employment data.

The expectation of a rate cut in December is full, but the subsequent uncertainty is high

After the CPI data was released, the market's confidence in the Fed's rate cut in December was basically certain. According to the forecast of CME futures, the probability of a rate cut on December 18th reached 99.9%. However, CME's expectations for rate cuts in 2025 are relatively pessimistic. It is expected that the total rate cut in 2025 will be only 50BP, with one in the first and second half of the year. The reason is that there are many expectations of rising inflation in the current US policy outlook, which may affect the Fed's remote decision-making. According to the policy guidelines currently announced by Trump, whether it is further corporate tax cuts, additional tariffs on overseas, or the aforementioned tightening of immigration policies, the direction of inflation is to expand, and it is very likely to raise the CPI core goods/CPI core services indicators, which are currently considered the most stubborn.

Although Federal Reserve officials, including Powell, agree that the current US inflation does not have the risk of a sharp rebound. On the other hand, if inflation remains at the current level for a long time, residents' inflation expectations may further develop in the direction of deterioration, and the original "inflation disease" will be regarded as normal, and the Fed's de-inflation process may become more difficult.

And for investors who pay attention to the US market, the uncertainty brought by Trump's coming to power is much higher than that of the Biden administration. The most eye-catching of these is the US administrative reform brought by the government efficiency department led by Elon Musk. There are still many unknowns in the deregulation program it announced, such as how the private sector will take on additional labor, what impact will internal layoffs have on administration, and even the handover between the Biden and Trump administrations, the impact of which is still in the fog.

Since the start of the interest rate cut cycle in September 2024, the Federal Reserve has always been more inclined to employment data in terms of data selection. However, as the environment changes, the possibility of "re-inflation" caused by Trump's administration has become a dark cloud over the Federal Reserve's interest rate meeting. Weighing the two, perhaps the Federal Reserve's data priority will once again fall to inflation.

What is certain is that Trump's second term will be different from the past and will bring many unconventional operations. Therefore, it is actually a very pragmatic approach for the market and even the Federal Reserve's interest rate meeting to remain cautious about future expectations. For market analysts, the days after January 2025 may be the high-pressure moment when the challenge begins.