October inflation figures this week show little progress toward the Fed’s 2% inflation target, raising questions about how deeply the Federal Reserve will cut rates in 2025.
On Wednesday, the ‘core’ consumer price index (CPI), which excludes the more volatile costs of food and gas, showed prices rose 3.3% in October for the third month in a row. Then on Thursday, the ‘core’ Producer Price Index (PPI) revealed that prices rose 3.1% in October, up from 2.8% the month before and above economists’ expectations for a 3% increase.
Taken together, the measurements contribute to an overall picture of persistent, persistent inflation within the economy. Economists don’t see the data changing the Fed’s outlook in December. And markets agree that the CME FedWatch Tool currently offers a nearly 80% chance that the Fed will cut rates by 25 basis points at its December meeting.
But the lack of recent progress on inflation could prompt the Fed to adjust its Summary of Economic Projections (SEP), which forecast the central bank would cut rates four times by 2025, or a total by one percentage point.
“PPI will not decisively change the Fed’s dovish bias, but it does make the mapping of the policy outlook more unclear,” National Financial Markets Economist Oren Klachkin wrote in a note to clients today. ‘We expect 75 [basis points] of cumulative Fed easing through 2025, but risks appear to be shifting to a more gradual pace of easing.”
“Their preference is to cut spending, but next year they will probably have to do it at a slower pace,” Stephanie Roth, chief economist at Wolfe Research, told Yahoo Finance (video above).
The markets have moved rapidly over the past two months to reflect this sentiment. On September 18, when the Fed cut rates by half a percentage point, markets had forecast that the Fed would end 2025 with a federal funds rate around 3%. Now the market is pricing in about 80 basis points less easing next year.
This speculation has also led to a large increase in bond yields over the past month. Ten-year Treasury yields (^TNX) have risen about 80 basis points since the Fed’s first rate cut in September. But that in itself hasn’t proven to be a headwind for the stock market rally, as all three indexes are within striking distance of new all-time highs. Investors have attributed the market’s resilience to stronger-than-expected economic data pouring in as bond yields rise.
“The reason it hasn’t hit the stock market is very simply because if interest rates rise, in part because growth will be stronger, that effect will be stronger in the stock market,” said co-chief investment officer of Bridgewater Associates. Karen Karniol-Tambour said at the Yahoo Finance Invest conference.
