November CPI Surprise Could Derail December Rate Cut Expectations, Say Fed Watchers
Fed-funds futures traders currently assign an 85% probability to the Federal Reserve delivering a 25-basis-point rate cut at its upcoming December policy meeting. This level of certainty aligns with historical patterns during the Fed’s “blackout” period, when officials abstain from discussing monetary policy ahead of a meeting.
As of Tuesday morning, CME FedWatch Tool data showed little change in rate-cut expectations, which remained at around 86%, a level consistent with late Friday. These expectations have fueled a robust stock market rally, with the S&P 500 and Nasdaq Composite hitting record highs last week, and the Dow Jones Industrial Average surpassing 45,000 for the first time.
Upcoming CPI Report Could Alter Market Expectations
The November consumer price index (CPI) report, due Wednesday, and Thursday’s producer price index (PPI) report are pivotal releases that could influence the Fed’s decision. Economists surveyed by The Wall Street Journal predict a 0.3% month-over-month increase for both headline and core CPI readings, with year-over-year headline inflation expected to tick up to 2.7% from 2.6% in October, and core inflation holding steady at 3.3%.
A significantly higher-than-expected CPI reading, such as a 0.4% monthly increase, could challenge the Fed’s easing trajectory, according to Jay Hatfield, CEO of Infrastructure Capital Advisors. However, such a scenario seems unlikely, with policymakers confident that inflation is gradually converging toward their 2% target.
The Fed’s Recent Stance and Market Sentiment
Minutes from the November meeting revealed a preference among Fed officials for a gradual approach to easing, with Chair Jerome Powell emphasizing the need to avoid rushing rate cuts. While the Fed appears poised to reduce rates in December, the “hawkish” tone could persist, with signals pointing to slower rate cuts moving forward.
Friday’s stronger-than-expected jobs report bolstered expectations for a December rate cut. Additionally, recent remarks from Fed officials, including Powell and Governor Christopher Waller, have not challenged market sentiment. Waller’s comments that he supports a cut barring any data surprises reinforced confidence in the December easing.
Dot Plot and Communication Strategy
The December meeting will include an updated Summary of Economic Projections, commonly known as the dot plot, outlining individual policymakers’ rate forecasts. A projection signaling only modest cuts in 2024 could help balance dovish and hawkish factions within the Fed, said Hatfield.
Final Considerations
While inflation remains the key wildcard, the bar for a data-driven shift in the Fed’s plans appears high. Policymakers are likely to remain focused on maintaining market stability while signaling a cautious path forward.
