October inflation readings out this week have shown little progress toward the Fed’s two percent inflation target, putting into question how deeply the Federal Reserve will cut interest rates in 2025.
On Wednesday, 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. Then on Thursday, the “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,” Nationwide financial markets economist Oren Klachkin wrote in a note to clients today. “We anticipate 75 [basis points] of cumulative Fed easing in 2025, but risks seem to be tilting toward a more gradual pace of easing.”
“Their bias is toward cutting, but they’ll probably have to have to go at a slower pace next year,” Wolfe Research chief economist Stephanie Roth told Yahoo Finance (video above).
Markets have quickly shifted over the past two months to reflect this sentiment. On Sep. 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. But that in itself hasn’t proved to be a headwind for the stock market rally, as all three indexes are within striking distance of new record highs. Investors have attributed the market’s resilience to stronger-than-expected economic data flowing in as bond yields rise.
“The reason it hasn’t hit the stock market is very simply because if the yield is rising, partly because growth is going to be stronger, that effect is going to be stronger on the stock market,” Bridgewater Associates co-chief investment officer Karen Karniol-Tambour said at the Yahoo Finance Invest conference.
