The softer-than-expected inflation report for June has fueled market expectations of a rate cut by the end of the year, which could occur before the November elections.
This speculation contributed to the US dollar’s recent decline and a surge in various market sectors, including bonds, small-cap stocks, and homebuilders.
Gavekal Research’s analysis pointed out that the current inflation data is more favorable for rate cuts than it was at the end of last year. As of December, the three-month annualized consumer price index (CPI) was below the Fed’s 2% target after adjustments.
Moreover, core CPI, which excludes volatile food and energy prices, also fell below the target, registering at 1.8% on a three-month adjusted basis.
Gavekal Research noted that if inflation continues to remain low and the Federal Reserve is confident it will stay that way, policy rates are likely to be lowered before 2023 ends, potentially ahead of the elections.
“In an ideal world, Fed chair Jay Powell may prefer not to change rates before an election, but such objections can be overridden by the data,” the strategists said in a note.
The research firm reflected on the historical precedent of the Federal Reserve altering rates in the months leading up to presidential elections.
Since 1974, during the 10 months preceding the 13 presidential elections, the Fed has changed rates eight times and maintained them five times.
This history suggests that the central bank does not shy away from making policy changes during election periods if warranted by economic indicators.
While the market reacts to the latest inflation data and its implications, the Federal Reserve, under Chair Powell’s leadership, remains committed to responding to economic data.
Hence, Gavekal Research strategists conclude that an interest rate change before the November elections is likely if the current inflationary trends persist.
