Market Digests Optimistic Fed Outlook: Soft Economic Data Supports 'Soft Landing' Scenario

Happily digesting

By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

Yesterday was about digesting Tuesday's softer-than-expected US CPI data, feeling relieved that the US Senate passed a stopgap spending bill to avert a government shutdown and welcoming a softer-than-expected producer price inflation, and a softer-than-expected decline in US retail sales – which came to support the idea that, yes, the US economy is probably slowing but it is slowing slowly, while inflation is easing at a satisfactory pace.  

The sweet mix of the recent economic data backs the idea that the Federal Reserve (Fed) could achieve what they call a 'soft landing' following an aggressive monetary policy tightening – and more importantly stop hiking the interest rates.  

At this point, investors are 100% sure that the Fed won't hike rates in December. They are 100% sure that the Fed won't hike rates in January. There is more than a quarter of a chance for a rate cut to be announced by March. And the pricing suggests that there is a higher chance for a rate cut in the Fed's May meeting, than not.  

Conclusion: investors threw the Fed's 'higher for longer' mantra out of the window this week.  

BUT this is certainly as good as it gets in terms of Fed optimism. If the markets go faster than the music, the Fed must calm down the game by a tough talk, and if needed, by more action. The Fed's Mary Daly expressed her concerns about the Fed's credibility if it declared victory over inflation prematurely. And credibility is the most important tool that a central bank has. When the credibility is broken, there is nothing to break.