CICC: Fed expected to likely hold rates steady in October, next rate hike may come in December

CICC released a research report stating that the Fed is expected to likely hold rates steady in October, with the next rate hike possibly coming in December. However, a slower pace of rate hikes does not mean a shift toward monetary easing. Considering robust U.S. economic growth, a resilient labor market, and still-elevated inflation, the Fed may maintain a tight monetary policy stance for an extended period. Over the next year, the likelihood of the Fed pivoting to rate cuts is low, and a high-interest-rate environment will remain the new normal that the U.S. economy and financial markets need to adapt to. U.S. September CPI rose 0.6% month-on-month on a seasonally adjusted basis and 3.7% year-on-year; core CPI rose 0.3% month-on-month and 2.6% year-on-year, both rebounding from the previous month and exceeding market expectations. The sources of price increases were broad, with energy, core goods, and rent all contributing. Elevated oil prices exacerbated energy inflation, resilient consumption and AI investment demand supported goods prices, and rent stickiness constrained the decline in services inflation. On monetary policy, the inflation rebound reinforced the necessity for the Fed to continue raising rates, but given the recent rise in U.S. Treasury yields and a stronger dollar, financial conditions have already tightened partially, and the Fed may exercise patience. CICC expects another pause in October and action again in December. However, a slower pace of rate hikes does not mean a shift toward monetary easing, and over the next year, the Fed may still maintain a tight policy stance. The sources of this inflation rebound were broad, with energy, core goods, and rent all contributing. On energy, as international oil prices remained elevated, the energy component rose 5.2% month-on-month on a seasonally adjusted basis in September, with gasoline up 9.1%, contributing more than half of the overall CPI increase. Fuel oil prices surged 15.3% month-on-month. Looking ahead, as Middle East geopolitical tensions have yet to ease, CICC believes energy inflation pressures are unlikely to abate in the short term and may continue to be reflected in October CPI data. Core goods inflation regained momentum, reflecting that household consumption demand remains resilient, and AI-related inflation pressures persist. Excluding energy and food, core goods prices rose 0.3% month-on-month in September, mainly driven by increases in toys (+4.2%), apparel (+0.3%), and used car prices (+0.7%). Toys and apparel may have been boosted by the back-to-school season and autumn clothing launches, while used car price increases reflect that households maintained some purchasing power amid high oil prices. Meanwhile, price pressures from the data center construction boom continued: computer software and accessories prices rose 0.4% month-on-month, with the year-on-year increase still as high as 28.4%; computers, peripherals, and smart home assistants prices rose 1.4% month-on-month, with the year-on-year increase reaching 9.7%, both continuing to set record highs on a year-on-year basis. Rent inflation stickiness strengthened, hindering the cooling of services inflation. In September, the shelter component rose 0.4% month-on-month, with owners' equivalent rent up 0.3% and primary residence rent up 0.2%. As rent carries a high weight in the CPI basket, it poses an obstacle to core inflation converging toward the 2% target. However, considering the recent sustained rise in mortgage rates and weakness in the real estate market, CICC believes the persistence of rent increases may be limited. Forward-looking indicators for rent also show no signs of sustained price increases yet. Non-housing core services inflation was relatively moderate, with wireless telephone services flat. In September, non-housing core services (supercore) prices rose 0.4% month-on-month, down from 0.5% the previous month. Among these, wireless telephone services prices were flat month-on-month (after surging 5.9% the previous month), no longer contributing to the month-on-month increase, suggesting that the earlier price increase was more likely a one-off. Transportation services prices rose 0.6% month-on-month, higher than 0.5% the previous month, with airfare prices up 1.2%, indicating that rising oil prices continued to put pressure on transportation costs. After the CPI release, the dollar strengthened, while U.S. stocks and gold fell notably. The market reaction was strong because the inflation overshoot broke the market's previous judgment on the pace of rate hikes, and investors began reassessing the possibility of a Fed rate hike in October. CICC believes that although the Fed needs to continue raising rates, the next hike may not necessarily occur in October. First, since the September FOMC meeting, the Fed has only received one set of nonfarm payroll and one set of CPI inflation data. Although today's inflation data supports further policy tightening, whether it is necessary to raise rates at two consecutive meetings may generate disagreement within the Fed. Second, the recent further rise in long-end U.S. Treasury yields, combined with a stronger dollar, has led to some degree of tightening in financial conditions. Rate-sensitive sectors such as real estate have been restrained, meaning the market has effectively performed part of the monetary tightening function, helping to reduce the pressure on the Fed to act immediately and buying it more time to observe inflation trends. Recent comments from Fed officials also reflect this inclination. Fed Governor Waller stated that further rate hikes will still be necessary in the future, but there is some flexibility on the timing; rate hikes need not occur at consecutive meetings but should be implemented within an acceptable timeframe. New York Fed President Williams said that one more rate hike this year may be appropriate, but whether further action is needed thereafter remains to be seen. Fed Governor Bowman, meanwhile, believed that before deciding whether to continue raising rates, there is still time to assess changes in financial conditions and the economic situation [3]. Overall, Fed officials have not denied the necessity of continuing to raise rates, but they tend to be patient on the pace of hikes. Chart 1: September CPI year-on-year growth rate rose Source: Wind, CICC Research Department Chart 2: Crude oil prices remain above $100/barrel Source: Wind, CICC Research Department Chart 3: Core goods inflation regains upward momentum Source: Haver, CICC Research Department Chart 4: AI-related inflation pressures persist Source: Haver, CICC Research Department Chart 5: Housing rent inflation stickiness strengthens Source: Haver, CICC Research Department Chart 6: Non-housing core services inflation eased somewhat Source: Haver, CICC Research Department