Castle Securities has indicated that a robust U.S. economy and persistent inflation will likely lead the Federal Reserve to implement only one more rate cut for the remainder of the year. Michael de Pass, the global head of rates trading at Castle Securities, suggests that a 25 basis point cut is expected, contrasting with market expectations of a 50 basis point reduction.
Following the release of a strong September non-farm payroll report, swap traders have adjusted their expectations for the Federal Reserve's rate cuts, now anticipating around a 47 basis point decrease by the end of 2024. Prior to the report, expectations were for a 75 basis point cut by year-end. De Pass considers this adjustment reasonable but still overly aggressive given the economic fundamentals and inflationary pressures.
The next key indicator for inflation will be the U.S. Consumer Price Index (CPI) for September. The consensus forecast expects core inflation to rise by 3.2% year-over-year. De Pass emphasized the challenge the Federal Reserve faces in tackling inflation, which remains above target. The recent strong employment report has shifted focus back to inflation, raising concerns about whether inflation will meet targets and how this might alter the Federal Reserve's response strategy.
