The data-dependent Fed is expected to lower interest rates on Wednesday by 25 bps, for a total of 100bps for 2024. They started cutting by 50 bps on September to avoid a potential recession, and so far, have managed to maintain relative price control, although inflation has not receded to the 2% target, and full employment. As you can see in the chart below, however, inflation breakevens, obtained from 2 and 5 year TIPs, have gone up since the Fed started the cutting cycle. None of them are still high enough to worry, but the trend is concerning, because if continued, it will imply the Fed has gone too far too fast and might be forced to pause, or even worse, reverse actions and hike. It is important to note that these breakevens spikes have occurred with a downtrend crude oil, and now that OPEC has decided to cut production, we may have another item contributing to inflation.
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