October Inflation Muddies Feds Path
October inflation readings out this week have shown little progress toward the Fed's 2% inflation target, putting into question how deeply the Federal Reserve will cut interest rates in 2025. The "core" Consumer Price Index (CPI), which strips out the more volatile costs of food and gas, showed prices increased 3.3% for the third consecutive month during October. The following day, "core" Producer Price Index (PPI) revealed prices increased by 3.1% in October, up from 2.8% the month prior and above economist expectations for a 3% increase. Taken together, the readings are adding to an overall picture of persistent, sticky inflation within the economy. Economists don't see the data changing the Fed's outlook come December. And markets agree with the CME FedWatch Tool currently placing a nearly 80% chance the Fed cuts rates by 25 basis points at its December meeting. But the lack of recent progress on the inflation front could prompt the Fed to adjust its Summary of Economic Projections (SEP), which had forecast the central bank would cut interest rates four times, or by one percentage point in total, throughout 2025. "PPI won’t decisively alter the Fed’s easing bias, but it makes charting the policy outlook murkier. We anticipate 75 basis points of cumulative Fed easing in 2025, but risks seem to be tilting toward a more gradual pace of easing." Markets have quickly shifted over the past two months to reflect this sentiment. On Sept. 18, when the Fed slashed rates by half a percentage point, markets had projected the Fed would finish 2025 with a federal funds rate around 3%. Now, the market is pricing in about 80 fewer basis points of easing next year. This speculation has also prompted a large increase in bond yields over the past month. The 10-year Treasury yield (^TNX) has added about 80 basis points since the Fed's first rate cut in September. At his most recent press conference on Nov. 7, Fed Chair Jerome Powell said inflation continues to come down on a "bumpy path" but declined to provide forward guidance on the Fed's path. "We don't know the right pace, and we don't know exactly where the destination of rates is," Powell said. "So the point is to find that, to find the right pace and the right destination as we go. And I think there's a fair amount of uncertainty about that. " But economists are taking hints from recent trends within the inflation prints. The three-month annualized rate of core inflation moved from 3.1% last month to 3.6% after the October CPI release. This underscores the recent lack of progress toward the Fed's 2% goal. Add the potential inflationary economic policies expected from President-elect Donald Trump, and the picture becomes even more uncertain. "We think the time is fast approaching when the FOMC will signal that the pace of rate cuts will slow further, perhaps to an every-other-meeting pace starting in 2025." Economists use the data from CPI and PPI to project a reading from the "core" Personal Consumption Expenditures (PCE) index, the Fed's preferred inflation gauge. Release, due out at the end of November, likely will show core prices rose 2.8% in October, up from 2.7% in September. "If our forecast proves correct, it will mark two consecutive uncomfortably high prints as the Fed seeks to return inflation to its 2% target."
