• US headline CPI inflation expected to bounce up to 2.6%
• Inflation stickiness could put December’s rate cut under examination  

 Fed to stick to its plan, at least for now

As the Powell-Trump relationship remains at odds, one thing remains clear: the Federal Reserve's focus on price stability and maximum employment will likely stay on course, regardless of the political shift. The Fed’s decisions will be driven by economic data rather than political rhetoric, at least until Trump returns to the Oval Office in January.

The central bank began its rate-cutting cycle in September, delivering a bold 50 basis points (bps) reduction following a disappointing NFP report. The miss in jobs data and the faster-than-expected decline in inflation readings raised concerns about the health of the economy, but more recent economic data revived hopes of a resilient US economy. As a result, the Fed quickly shifted back to normal 25bps cuts just a day after Trump’s victory.

Will back-to-back rate cuts continue?

Now, the big question is whether further consecutive rate cuts are on the cards. On the one hand, interest rates are still in restrictive territory, and the Fed may need to ease further to secure a “soft landing.” On the other hand, the inflation outlook is anything but certain, particularly with Trump’s proposed tax cuts and tariffs potentially heating up inflationary pressures.

Besides, regardless of the election outcome, inflation has already moved close to the Fed's 2% target. This raises the possibility that borrowing costs could remain higher than the pre-pandemic neutral rate unless the economy shows serious cracks.

October's CPI inflation to test rate cut expectations

Hence, the coming data releases will matter greatly, particularly because the Fed is retaining a data-dependent strategy amid a challenging internal and external economic and political environment. October’s CPI inflation report will be the first test for Fed policymakers. Following September’s drop to 2.4% y/y, the headline CPI is forecast to rebound to 2.6% y/y and hold a steady monthly positive pace of 0.2%. The core CPI measure, which excludes volatile food and energy prices, could also hold stable around 3.3% y/y.

Market reaction

How the data shapes up will be pivotal. If inflation shows signs of stickiness, it could ease expectations for another rate cut in December. Futures markets are currently pricing in an 85% chance of a 25bps reduction. In FX markets such an outcome could prompt another rally in the US dollar, lifting USDJPY as high as 157.00 or up to 158.80.

However, if the CPI data – and especially the core CPI measure – arrives softer than expected, the Fed may be encouraged to push ahead with another 25bps rate cut in December, which could consequently squeeze USDJPY back below 153.00 and closer to the 200-day simple moving average (SMA) at 151.75. A sharper downturn could test the 150.75 support zone.