On October 10th, the United States reported that the Consumer Price Index (CPI) for September rose by 2.4% year-over-year, marking a decline for the sixth consecutive month, but it was higher than the market's expectation of 2.3%. The Federal Reserve, which places greater emphasis on core inflation rates that exclude energy and food prices, saw a rate of 3.3%, also higher than the market's expectation of 3.2%. Following the release of this inflation data, the Chicago Mercantile Exchange's FedWatch tool indicated that the market expected an 82.3% probability of a 25 basis point rate cut in November, which did not change significantly.

Overall, this inflation data somewhat undermines the credibility of the Federal Reserve meeting minutes released on October 9th. The Federal Reserve is adept at managing expectations by maximizing the impact of a single piece of information. For instance, the minutes from each Federal Reserve interest rate meeting are not released on the day of the meeting itself, but rather about three weeks after the meeting has concluded. For example, the minutes from the interest rate meeting held on September 18th in U.S. time were not published until October 9th. The minutes primarily disclose some of the discussions among the Federal Reserve's dozen or so policymakers. By releasing the content and outcomes of an interest rate meeting over two separate time periods, the Federal Reserve can influence the market twice, achieving the effect of maximizing the impact of a single piece of information.At the same time, the content of the same interest rate meeting, when split into two parts and released in such a manner, will also have a marginal effect on the market. The ultimate result is that the market's reaction to the interest rate meeting will become more muted.

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This is actually an important outcome of expectation management, breaking down a significant piece of news into multiple time periods and continuously releasing it to the market.

This avoids the situation where a significant piece of news is suddenly announced without any market expectation, leading to an overreaction in the market and causing huge fluctuations in the stock market.

Allowing financial markets to fully digest significant news over a longer period of time ensures that when the news is finally released, its impact on financial markets is minimized.

However, the minutes of this Federal Reserve meeting, apart from managing expectations, are more importantly trying to dispel market concerns about a U.S. economic recession. Therefore, they keep explaining that the Fed's decision to cut interest rates by 50 basis points in September was not due to pressure from a U.S. economic recession.

To this end, the Federal Reserve's minutes are not afraid to create the illusion of "policymaker disagreement."

Thus, there are reports stating, "There is still disagreement within the Federal Reserve about cutting interest rates by 50 basis points without a clear recession in the U.S. economy."

The Federal Reserve's minutes show, "Officials who supported a 50 basis point rate cut believed that inflation had fallen and employment continued to weaken, so a rate cut should have been implemented in July, and therefore September should make up for the easing that should have been implemented in July. Some officials who supported a 50 basis point cut acknowledged that they could also support a 25 basis point cut. The larger rate cut approved by the meeting should not be seen as a signal of concern about the economic outlook. A large rate cut is not the norm, nor should it be seen as a signal that the Federal Reserve is preparing to cut rates quickly."

This statement is somewhat disingenuous. Since some Federal Reserve policymakers believe that the U.S. economy has not entered a recession and does not need a 50 basis point rate cut, why do they still support a 50 basis point rate cut instead of choosing a 25 basis point cut?What's the point of saying, "Some officials who supported a 50 basis point cut admitted that they could also support a 25 basis point cut"?

But the actual outcome was that at the Federal Reserve's interest rate meeting on September 18th, out of the 12 voting members with voting rights, 11 voted in favor of a 50 basis point rate cut, and only 1 opposed.

Despite all the talk from the Federal Reserve, they still ended up cutting rates by 50 basis points. This is the most straightforward result; everything else is just an explanation that serves as a cover-up, making things worse the more it's described.

If the Federal Reserve has the ability, they should raise interest rates back up.

This meeting minutes from the Federal Reserve also devotes a significant portion to massaging the market's psyche. The Federal Open Market Committee believes that the upside risks to the U.S. inflation outlook have diminished, while the downside risks to employment are considered to have increased. Most officials think the downside risks to employment have increased, but some officials do not believe there is a significant risk of further substantial weakening in labor market conditions.

But has the upside risk to the U.S. inflation outlook really diminished?

The latest inflation rate data released the day after these minutes were published actually contradicts this claim.

Although the September CPI has been declining for six consecutive months, it is still slightly higher than market expectations.

But most crucially, the core inflation rate, which the Federal Reserve pays more attention to, has rebounded.

The September core inflation rate of 3.3% is slightly higher than the previous month's 3.2%;That is to say, although the rate of inflation in the United States has slowed down, the problem still exists.

Firstly, the inflation rate is merely the year-on-year CPI data. A decrease in the inflation rate only indicates that the pace of further price increases has slowed down, not that prices have returned to pre-pandemic levels.

In reality, the U.S. CPI prices are still continuously rising; it's just that the rate of increase has slowed compared to the previous surge, which leads to a decrease in the inflation rate.

Additionally, there is an issue with the U.S. CPI compilation, which is that the proportionate weight of the housing category is too large.

The housing price category in the U.S. CPI accounts for about one-third of the overall CPI, and an even larger proportion in the core CPI.

Therefore, over the past two years, the rise in rent has been an important factor driving the surge in U.S. inflation.

Of course, U.S. inflation is not solely driven by the increase in rent.

Apart from rent, based on my observation of Americans' reactions online, other prices in the United States have generally increased by about 50% over the past few years compared to pre-pandemic levels, which is a greater increase than what the CPI indicates.Therefore, the current driver of the decline in U.S. inflation is the significant weight of falling rents. In the September U.S. CPI data, housing costs decreased by 0.2% month-on-month and 4.9% year-on-year.

The decrease in housing costs is based on the ultra-high mortgage interest rates brought about by the Federal Reserve's substantial interest rate hikes. Before the Federal Reserve lowered interest rates, the highest U.S. 30-year mortgage interest rate exceeded 7%. Even after the Federal Reserve recently cut interest rates by 50 basis points, the U.S. 30-year mortgage interest rate remains at a high level above 6%.

Moreover, due to the Federal Reserve's unlimited money printing in 2020, U.S. housing prices experienced a new round of skyrocketing.

However, after the Federal Reserve began aggressive interest rate hikes in 2022, although U.S. housing prices had a correction, by 2023, U.S. housing prices were generally in an upward trend despite the high mortgage interest rates. This is somewhat unusual.

In contrast, U.S. rents began to decline last year, which has become the main reason for the decline in inflation over the past year. But even though U.S. rents have started to decline, they are still much higher than before the pandemic.At the beginning of this year, a CNN report in the United States was titled "Half of American Renters Unable to Pay Rent."

The report stated that although rents nationwide in the United States fell for the eighth consecutive month in December, the average rent was still 22% higher than the same period in 2019, before the pandemic. According to data from the Joint Center for Housing Studies at Harvard University, more than one-third of the income of 22.4 million American households is spent on rent, and 12 million renters spend more than half of their income on housing.

The U.S. Census Bureau's "2023 American Community Survey" estimates that by 2023, nearly half (49.7%) of American renter households will spend more than 30% of their income on housing costs.

Therefore, it is important to note that if the United States were to enter a period of falling housing prices, which then leads to a decrease in rent, it might help to reduce inflation.

However, a decline in housing prices from high levels is not necessarily a good thing for the United States.

Starting in July of this year, there has been a trend of falling housing prices in the United States.

Overall, I believe the so-called divergence mentioned in the minutes of the Federal Reserve's meeting is just a facade for managing expectations.

It is clear that there are beginning to be issues with liquidity in finance, and unemployment rates are also rising, making it unsustainable, which is why there was a rush to lower interest rates by 50 basis points.Then now, release the minutes from last month's meeting, pretending that there was a significant disagreement among the decision-makers at the meeting, who thought that the U.S. economy was fine and therefore did not need a 50 basis point rate cut. After saying all this, the Federal Reserve still chose to cut rates by 50 basis points.

If the U.S. economic outlook had not deteriorated, why would the Federal Reserve cut rates by 50 basis points?

This is something that the Federal Reserve cannot explain, no matter how they manage expectations or try to cover it up.

What the Federal Reserve can do now is to cover up.