Proceed with Caution — Evening Brief – 11.13.24
The consumer price index (CPI) gained 0.2% in October and 2.6% on an annual basis, both in line with expectations. The 0.2% increase matched the September figure, while the 2.6% reading was up 0.2% from a year ago. Core index prices, excluding volatile food and energy, remained stable, up 0.3% in October and 3.3% year on year, reported the Bureau of Labor Statistics on Wednesday.
The Federal Reserve is now considering whether to lower interest rates in December. Officials forecasted such a move in September, and markets continue to expect it, but Fed Chair Jerome Powell said that a cut is not guaranteed during his last news conference, and other Fed officials have hinted at the possibility in recent days.
The headline numbers from the October consumer price report demonstrate that “inflation is headed in the right direction,” Federal Reserve Bank of Minneapolis President Neel Kashkari said. In an interview with Bloomberg Television, Kashkari said he’s confident that inflation is heading down toward the Fed’s 2% goal, “but we need to wait. We’ve got another month or six weeks of data to analyze before we make any decisions.”
Kashkari stated on Tuesday that “it may take a year or two” for inflation to fall back to 2%. He had stated that a December rate cut might not occur if inflation surprises to the upside.
Dallas Fed President Lorie Logan advised the FOMC to exercise caution in policy easing as inflation approaches the central bank’s 2% target. “With less room to maneuver, monetary policymakers need to be more prepared for winds and waves that could push us off course. Just like a ship captain,” she said at the 9th joint energy conference hosted by the Federal Reserve Banks of Dallas and Kansas City on Wednesday. “I think it behooves us to proceed cautiously at this point.”
Meanwhile, recent data suggests that the risk of inflation “ceasing to converge toward 2%, or moving higher, has risen,” while the risk of labor market deterioration hasn’t changed and may have fallen, noted St. Louis Fed President Alberto Musalem during an event at the Economic Club of Memphis.
His baseline scenario expects monetary policy to remain “appropriately restrictive” while inflation remains above 2%.
The growing uncertainty over whether the Fed will cut rates next month is evident in the wild swings witnessed in market odds. Currently, the implied probability of another rate cut is about 82%, but the day before the odds were just 59%, according to the CME FedWatch Tool, and a week ago they were 70%. Expectations for the likelihood of more easing have been on a roller-coaster ride since Donald Trump’s victory last week.
The steady rise in the policy-sensitive U.S. 2-year Treasury yield is another indication that the market may be less confident about the prospect of further rate cuts. On Tuesday, the yield, which is often used as a proxy for the near-term rate outlook, traded at its highest level since late July, reaching 4.34%.
It is worth noting that the spread between the 2-year yield and the higher median effective Fed funds target rate has decreased to -24 basis points, the lowest level in over a year. The implication is that the Treasury market’s expectation of additional rate reductions is diminishing.