The Federal Reserve likely won't raise interest rates again during its current tightening cycle, thanks to a cooldown in inflation.
Interest rates are at a 22-year high after the Fed last March began its punishing pace of rate hikes in a bid to tame wayward inflation. The central bank earlier this month held rates steady for a second consecutive meeting, giving hope that its campaign to bring down prices is nearly over.
That optimism blossomed this week, after a slate of economic data indicated that inflation is continuing to slow. Traders are now virtually certain that the Fed will hold rates steady at its December policy meeting and won't hike again this cycle, according to the CME FedWatch Tool.
Stocks and bonds have both surged in recent days, as investors cheered the softer-than-expected data reports. For the week, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite have each added roughly 2%.
While Wall Street has gotten ahead of itself before when it comes to the Fed's next moves, investors and economists say that might not be the case this time.
"Markets have got it right that the Fed is done, inflation is trending in the right direction [and] the economy's slowing just a tad," said Jeffrey Roach, chief economist at LPL Financial.
Here's a breakdown of this week's game-changing data.
Consumer inflation: The Consumer Price Index rose 3.2% for the 12 months ended in October, down from 3.7% the prior month, according to data released Tuesday by the Bureau of Labor Statistics. That's the lowest yearly rate since early 2021.
Core CPI, which doesn't include the volatile food and energy categories, rose 0.2% on a month-over-month basis. The 4% annual increase in that measure of inflation is its weakest since September 2021.
After stripping out food, energy and shelter, the October CPI gained just 2% year-over year, according to Yardeni Research. That's in line with the Fed's target, even if the rest of the inflation categories have yet to catch up.
Wholesale inflation: The Producer Price Index for October showed more signs of slowing inflation, bolstering the case for a prolonged Fed pause. US wholesale inflation fell 0.5% on a monthly basis, down from the 0.4% jump in September. The decline is also the sharpest monthly drop since April 2020, when the Covid pandemic sent the economy nosediving.
The index gained 1.3% for the 12 months ended in October, down from a 2.2% rise the month before.
Retail sales: Rounding out the trifecta of softening economic data, Americans are winding down their spending for the first time in months. That's a sign that higher borrowing costs could be helping slow down the US economy.
Retail sales, adjusted for seasonality but not inflation, declined 0.1% in October from September, logging their first monthly decline since March and a reversal from robust spending during the summer.
Sharp drops in sales of extravagant items like cars and furniture helped drive that number lower, though spending at restaurants and grocery stores continued to climb.
Of course, one month's data doth not a trend make. Fed Chair Jerome Powell has maintained through the central bank's tightening cycle that it won't declare victory until inflation reaches the long-elusive 2% target.
"The Fed is probably not going to take an overly softer dovish tone relative to November messaging and really doesn't want to key off just one month of data," said Yung-Yu Ma, chief investment officer at BMO Wealth Management.
Traders are anticipating rate cuts won't start before next March, and see May as more likely, according to the CME FedWatch Tool. Investors and economists have warned that it's unlikely that the Fed will ease monetary policy anytime soon unless economic conditions deteriorate significantly and force its hand.
The central bank is also likely to keep rates higher for longer to avoid cutting too soon — a mistake it made in the 1970s, after which the Fed hiked rates dramatically to tame inflation, helping trigger back-to-back recessions that drove the unemployment rate as high as 10%.
"It will be some time … before the Fed is comfortable altering that policy stance and cut rates," wrote Joseph Brusuelas, chief economist at RSM US, in a note on Tuesday.
Comments
Post a Comment