This week’s inflation numbers aren’t doing the Fed any favors in reaching its 2% target, which could impact how much they cut interest rates in 2025.
Here’s what’s going on: On Wednesday, we saw the “core” Consumer Price Index (CPI)—which skips food and gas prices since they tend to bounce around—staying steady with a 3.3% increase for the third month in a row. Then on Thursday, the “core” Producer Price Index (PPI) came out, showing a 3.1% rise in October, a bit higher than expected.
These reports suggest inflation is sticking around, and it’s making things a bit hazy for the Fed’s future plans. For now, the Fed’s December outlook doesn’t seem to be shifting, with markets giving about an 80% chance of a small rate cut then. But as inflation stays high, the Fed may need to rethink its plan of cutting rates four times (or by 1% total) over 2025.
Nationwide economist Oren Klachkin explained that while the Fed wants to cut rates, they might have to take it slower than expected. Meanwhile, Stephanie Roth from Wolfe Research also pointed out that a slower rate-cut pace seems likely.
Over the past couple of months, the markets have adjusted expectations. Back in September, they thought rates would land around 3% by the end of 2025, but now they’re expecting a more cautious path. This shift has pushed up bond yields, but it hasn’t slowed down the stock market, thanks to solid economic data that’s keeping investors optimistic.
At a recent conference, Bridgewater Associates’ Karen Karniol-Tambour explained why higher bond yields aren’t dragging down stocks. The reasoning? When yields rise because the economy is doing well, it actually strengthens the stock market.
Fed Chair Jerome Powell added that while inflation is coming down, it’s still a “bumpy path” and no one’s quite sure where rates are headed yet. Economists are picking up clues, though. Recent trends show core inflation edging higher, moving from 3.1% to 3.6% over the past month, making it clear the Fed’s 2% target is still a ways off.
Some analysts, like Wells Fargo’s Sarah House, think we might see the Fed slowing down its rate cuts even more, maybe even spacing them out to every other meeting in 2025.
Economists are now watching the “core” Personal Consumption Expenditures (PCE) index, the Fed’s go-to inflation measure, which is due at the end of November. Bank of America economist Stephen Juneau expects it to show core prices up 2.8% in October. He reassured clients not to panic, noting that some of the inflation in October came from things like financial services and airfare, which may not stick around.
Bottom line: Inflation’s holding strong, and while the Fed is still aiming for rate cuts, the timeline may be slower than expected if these trends continue.
