US: Plunge in inflation expectations suggests Fed will cut rates again in October – ING

James Knightley, Senior Economist at ING, explains that consumer confidence improved in October, suggesting households still have an appetite to spend, but he warns the decline in inflation expectations at a time of weakness in business surveys points the Federal Reserve will cut rates again at the next meeting. 

Key Quotes: 

“The recent run of US economic data has been poor. The ISM manufacturing and non-manufacturing series are in freefall, the National Federation of Independent Business (NFIB) small business series is in its worst position since Donald Trump became President and employment and wage growth appear to be stalling. Despite that, the consumer remains upbeat with the University of Michigan consumer sentiment index rising to a three month high versus expectations that it would post another decline.”

“The consumer inflation expectations series has hit an all-time low of 2.2% looking over a 5-10 year horizon while on a 1 year horizon it has fallen to 2.5% from 2.8%. With market-based measures of inflation (using Treasury Inflation Protected Securities) also at rock bottom levels (around 1.5%) this will make the Federal Reserve nervous about hitting their inflation target over the medium term. As such this may be the more significant story in this report and should help nudge October rate cut expectations even higher.”