US equity investors are closely monitoring the Federal Reserve's policy statement this week, seeking insights on the trajectory of interest rates for the remainder of the year due to recent price data igniting discussions on the robustness of the disinflationary trend. Last week, both the headline and core consumer price index for November saw increases that aligned with expectations.
However, the producer price index came in stronger than anticipated, raising concerns that the Federal Reserve may pause its easing cycle following its widely expected 25 basis-point cut on Wednesday intended for December. The likelihood of a rate cut in January has dropped to 17%, a decline from the figures seen on Friday, a week prior, and a month ago, as reported by the FedWatch Tool data early Monday.
Predictions indicate a projected rate range of 3.75% to 4% a year from now, in contrast to the current range of 4.5% to 4.75%. "The recent strength of the US economy, underscored by robust price and wage data, suggests a 'higher for longer' perspective," noted Scotiabank in a release last Friday. In addition to awaiting the Fed's updated Summary of Economic Projections and Chair Jerome Powell's press briefing on Wednesday, attention will also be on retail sales data set for release on Tuesday.
The Fed's preferred inflation metric, the Personal Consumer Expenditures Price index, is scheduled for Friday, subsequent to the December policy decision, diminishing its influence due to the plethora of economic data expected prior to the Fed's next assembly on January 29. Scotiabank highlighted the "massive uncertainty" surrounding the policy direction of the Trump administration regarding tariffs, regulatory alterations, immigration policy changes, and net fiscal policy adjustments concerning taxation and expenditure.
This uncertain environment suggests that investors will center their focus on the FOMC's decisions on January 29 -- nine days post the Presidential inauguration -- along with the upcoming Summary of Economic Projections and dot plot scheduled for March. Investors are also expected to closely track government bond yields, especially with the US 10-year Treasury yield spiking to 4.39% on Friday, up from 4.14% the previous week, marking its peak in three weeks.
This surge is attributed in part to ongoing uncertainties regarding the strength of the disinflationary trend in the US..