📍 Expectations for the Fed to lower interest rates in December continue to recede

📌 After a series of slow declines in service inflation data and the hawkish statements from Daly (San Francisco Fed) and Hammack (Cleveland Fed), the market quickly repriced its expectations for monetary policy. The probability of the Fed cutting interest rates in December is currently around 40%, reflecting a noticeably more cautious sentiment compared to the early part of the quarter.

📌 Core CPI ( excluding the impact of tariffs ) still shows a downward trend, the cooling labor market has pulled back consumer demand which is slowing down - all of which are conditions that the Fed considers when contemplating a policy shift.

📌 According to data from the San Francisco Fed based on 150 years of tariff data, historical tariff shocks do not cause inflation; rather, they often create deflationary effects through the channel of weakened demand.
The Fed has more room to lower interest rates without worrying about a prolonged price spiral.

📌 Therefore, the expectation for a rate cut in December and the early QE is awaiting confirmation from economic data:
- If service inflation continues to cool down → the probability of a cut will increase.
– If the labor market weakens faster than expected → the Fed has the motivation to loosen.
- If tariff measures continue to be deflationary → the Fed has more policy space.