- Inflation is not much of an issue
- Central bank adopts milder tone, supporting the economy and financial assets
- Watch trade, the elections and… Brexit
Recent inflation developments
On the inflation side, there is little news. After three strong reports on consumer prices in the third quarter, Q4 2019 brought only relatively soft numbers. Core CPI retreated slightly, from 2.4% year-on-year (YoY) to 2.1%.
The Personal Consumption Expenditures (PCE) measure – the inflation gauge favoured by the Fed – also fell back: from 1.76% YoY in August to 1.62% YoY in November. The data suggests that cyclical pressures are continuing to drive inflation up, but this is offset by falls in a-cyclical components.
Monetary policy developments
After lowering policy rates in July and September, the Fed cut rates again in October. For the first two rate cuts, the central bank had emphasised that it viewed these as a ‘mid-cycle adjustment’ and cuts intended to protect the economy against any downside risks from the trade dispute with China.
Investors interpreted that cautious wording as reluctance to embark on a full rate cutting cycle. In December, leaving rates unchanged, the Fed referred to ‘global developments and muted inflation pressures.’ This suggested rate cuts were still more likely than increases.