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Diverging expectations

The last important data point prior to the last FOMC meeting was published yesterday. US CPI for the month of November grew 3.1% YOY which was in line with consensus. In the chart below you can see the breakdown by category where Energy was the component that retracted the most and transportation and shelter the ones that kept adding to the index. Now the data dependent Fed is overseeing an economy with full employment and somehow controlled inflation: why would they lower rates? Unless there is an exogenous factor, the FOMC committee can in fact leave rates higher for longer. The problem is that the market has already priced in the cuts, and the Fed feels very uncomfortable when expectations between market and Fed diverge too much. Powell has now the daunting task of adjusting market expectations, through speeches, gradually to avoid a market correction.

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