US CPI determines the Federal Reserve's (FED) rate cut magnitude! 0.25% or 0.5% data will be revealed on Friday.

The U.S. CPI report for September will be released on Friday, coinciding with the government shutdown, and this is the only key data point before the Federal Reserve's meeting on October 29. With other data frozen, the market sees the U.S. CPI as a decisive factor in determining the Federal Reserve's decision to cut rates by 0.25%, and possibly by 0.5% if inflation cools. CPI data is typically released on Tuesday or Wednesday, and it is extremely rare for it to be released on a Friday.

US CPI released on Friday: A rare opportunity for the first time in 7 years

(Source: MarketWatch)

Since 2018, the U.S. CPI will be released on Friday for the first time, and this time it is under extremely unusual circumstances. The inflation report for September will be released this Friday, while the U.S. government is currently in a prolonged shutdown, leading to the suspension of most other federal data releases. This leaves the Federal Reserve with limited insights before its crucial policy meeting on October 29.

“Some unusual things have happened this week… not just because there are only 5 days until the Federal Reserve meeting on October 29,” wrote Adam Kobeissi. The U.S. CPI report is typically released once a month, usually around the 10th to the 13th of the following month. For example, the CPI data for August was released on September 11, while the CPI data for July was released on August 12.

According to tradition, the U.S. Bureau of Labor Statistics (BLS) releases the U.S. CPI at 8:30 AM (Eastern Time) on Tuesdays or Wednesdays. Therefore, it is extremely rare for data to be released on a Friday; the last time was in January 2018. In terms of comparison with the Federal Reserve meeting schedule, U.S. CPI data is typically released 1 to 2 weeks before the Federal Open Market Committee (FOMC) meetings. This gives policymakers sufficient time to analyze the CPI data in conjunction with other indicators before deciding on interest rates.

Against this backdrop, the emergence of timing has sparked speculation about bullish inflation data. This could lay the groundwork for the Federal Reserve (FED) to cut interest rates again. The next step for the Federal Reserve (FED) almost entirely depends on this inflation data. With the market expecting that the Federal Reserve (FED) is almost certain to cut rates by 0.25%, investors are closely watching whether weaker CPI data will prompt policymakers to adopt a more aggressive 0.5% rate cut.

The Federal Reserve (FED) is 99% certain to cut interest rates: 0.25% or 0.5% depending on CPI

(Source: CME Fed Watch)

Due to market expectations that interest rates will almost certainly be lowered by 0.25%, investors are closely watching whether the weaker U.S. CPI data will prompt policymakers to take more aggressive measures with a 0.5% Federal Reserve (FED) rate cut. One user commented, “Currently, the probability of a 0.25% rate cut is about 99%… If the rate cut is lower than expected, the likelihood of a 0.5% cut may increase.”

The CME FedWatch tool shows that the market pricing for a 0.25% rate cut by the Federal Reserve (FED) is nearing 99%, which means the market is almost completely certain that a rate cut will occur. The only uncertainty is the magnitude of the rate cut. A 0.25% (25 basis points) cut is the standard rate cut magnitude, while a 0.5% (50 basis points) cut represents a more aggressive easing policy, typically adopted when the economy faces severe downside risks.

How will the US CPI data affect this decision? If the September CPI year-on-year growth is lower than expected (the market expects around 2.3% to 2.5%), indicating that inflationary pressures are indeed cooling, the Federal Reserve (FED) may have room to take a more aggressive 0.5% rate cut to support economic growth. Conversely, if the US CPI is higher than expected or remains flat, the Federal Reserve (FED) may cautiously only cut rates by 0.25% to avoid overstimulating and potentially reigniting inflation.

Two Scenarios for the Federal Reserve (FED) Interest Rate Cut:

Scenario 1 (0.25% Rate Cut): CPI meets or slightly exceeds expectations, The Federal Reserve (FED) adopts a standard rate cut, market pricing at 99%

Scenario 2 (0.5% Rate Cut): CPI is significantly lower than expected, inflationary pressures have clearly eased, and The Federal Reserve (FED) adopts an aggressive rate cut, with market pricing below 10%.

Historically, the Federal Reserve (FED) tends to be cautious at the beginning of a rate cut cycle, favoring a standard increment of 0.25%. Only when economic data clearly worsens or significant risks appear in the financial markets will it consider a substantial cut of 0.5%. Although current economic data shows signs of slowing, it has not yet reached crisis levels, making a 0.25% rate cut more likely.

Government Shutdown Freezes Data: The Blind Spots of The Federal Reserve (FED) Interest Rate Decision

No other important reports will be released before the government shutdown ends, including employment and retail sales data. However, the situation is different, as the U.S. CPI data will be released five days before the Federal Reserve (FED) meeting on October 29. This data vacuum presents an unprecedented challenge for the Federal Reserve (FED) in making interest rate decisions.

According to analysts surveyed by MarketWatch, the upcoming September US CPI report is expected to show that the consumer price index continues to rise, but the increase may be lower than in August. This signal suggests that inflationary pressures may be easing. However, the overall situation remains uncertain. The ongoing government shutdown has disrupted data collection and exacerbated political and fiscal tensions, which could affect The Federal Reserve (FED)'s risk assessment.

Without the latest data on labor and retail, policymakers may rely on partial or outdated data when assessing whether the slowdown in inflation is sufficient to justify the continuation of accommodative policies. The data released on Friday may be the only clear data before the Federal Reserve's interest rate decision next week.

At the same time, officials from The Federal Reserve (FED) have hinted that concerns about a weakening labor market are growing, which supports a rate cut. However, if the U.S. CPI data comes in higher than expected, it could complicate the outlook further, forcing the FED to weigh the risks of inflation against the possibility of economic stagnation.

The Ripple Effect in the Crypto Market: The Federal Reserve (FED) Cuts Interest Rates and Liquidity

Due to the need for the Federal Reserve (FED) to strike a balance between easing inflation and political and economic instability, the rare U.S. CPI release on Friday heightened uncertainty. For the cryptocurrency market, interest rate cuts by the Federal Reserve (FED) are generally viewed as bullish, as rate cuts imply increased liquidity and rising pressure on the dollar's depreciation.

However, the current market reaction to the Federal Reserve's interest rate cuts may be more complex. If the rate cut is due to deteriorating economic data (for example, a significant drop in CPI accompanied by signs of economic recession), risk assets may decline due to economic concerns. In contrast, if the rate cut occurs in the context of moderate inflation decline while the economy remains healthy, the crypto market may experience a liquidity-driven rally.

The release time of the U.S. CPI data (Friday) and its proximity to the FOMC meeting (only 5 days) leaves the market with insufficient time to fully digest the data. This compressed timeframe could lead to significant volatility around October 29, as the market will quickly adjust its expectations for the Federal Reserve's interest rate cuts.