CPI report points to gradual pace for rate cuts: what experts say

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CPI report points to gradual pace for rate cuts: what experts say

A slightly hotter-than-expected September CPI report keeps the Federal Reserve on track to cut interest rates at a gradual pace as the broader disinflation trend seen in the US economy remains on track, experts say .

Although headline inflation fell for a sixth straight month in September to the lowest level since early 2001, the reading beat economists’ expectations due to stiffness in some subcomponents of the consumer price index.

For the record, the annual CPI fell to 2.4% in September from 2.5% the previous month, according to the data Bureau of Labor Statistics. That beat economists’ forecast for a 2.3 percent rise in inflation. More importantly, the core CPI, which excludes volatile food and energy costs and is considered a better gauge of future prices, rose 0.3 percent. This beat expectations for a 0.2% increase.

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The decline in annual inflation was helped by lower energy prices, while core inflation rose due to persistent housing costs, notes Jim Baird, chief investment officer with Plante Moran Financial Advisors.

“At 2.4%, headline inflation isn’t terribly worrying,” Baird writes, “especially since it’s been running at an even lower rate of well below 2% annualized over the past six months — a pace that would itself suggest that the Fed’s war against Inflation was probably won, if anything the report was good enough to bolster the case for another quarter-point rate cut.”

While inflation has not fallen fast enough to warrant an accelerated pace of policy easing, today’s positive surprise “doesn’t raise serious questions about the underlying disinflationary trend,” adds Baird.

A September jobs report has already sent market participants frantically recalibrating their bets on how quickly the Federal Reserve will normalize borrowing costs. The latest CPI report, while coming in today, only appeared to confirm expectations for a 25 basis point (bps) cut, or 0.25%, at the Fed’s next meeting.

As of Oct. 10, futures traders assigned the Federal Open Market Committee (FOMC) an 89% probability of cutting the short-term federal funds rate by 25 basis points in November, up from 68% a day ago week. Odds of a 50 basis point cut fell to 0% from 32% last week, according to CME Group FedWatch toolwhile the odds of the Fed standing by rose to 11% from 0% a week ago.

With September’s CPI report now a matter of record, we reached out to economists, strategists and other experts for their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Please see a selection of their comments below, sometimes edited for brevity or clarity.

The expert receives the CPI report

CPI reports inflation

(Image credit: Getty Images)

“The CPI inflation data was slightly on the warm side, with commodity (non-) energy prices rising more than expected. The good news is that shelter inflation is retreating and that will drag inflation lower. The big picture is that inflation continues to fall. , albeit with some bumps along the way.” – Sonu Varghese, global macro strategist at The Carson Group

“The September CPI report came in a little hotter than expected, but nothing we think will disrupt the Fed’s plans to cut by 25 basis points in February. The relative strength of recent economic data suggests that the Fed may move less or more slowly in normalizing interest rate policy, but still sees it as restrictive and wants to maintain the delicate balance between a well-functioning economy and one that would unnecessarily weaken the market work”. – Lauren Goodwin, Economist and Chief Market Strategist at New York Life Investments

“September’s CPI report came in stronger than expected, with core CPI in particular surprising on the upside. However, labor market data remains the primary market for the Fed, and we see next month’s payrolls release as the most important data point in determining the pace and extent of Fed easing.” – Whitney Watson, Global Co-Head and Co-Investment Officer for Fixed Income and Liquidity Solutions within Goldman Sachs Asset Management

“We maintain our call for a 25bp cut at the November FOMC meeting. Although the core CPI surprised upward for the second consecutive month, it appeared to be driven by some volatile components, while the sticky shelter category saw material disinflation. We believe the FOMC will remain confident that the disinflation narrative is intact and will continue to see a gradual easing of the funds rate, as is warranted at the next two meetings, given the 50 basis point cut at the September meeting.” – Pooja Sriram, American economist at Barclays

“Primary and core CPI numbers were slightly higher than consensus expectations. The gap — along with the recent stronger-than-expected jobs report — probably wasn’t enough to prompt the Fed to back down on its view that inflation and employment are now “in balance.” However, these two data points appear to have increased the likelihood that the next cut will be no more than 25 basis points, and there could possibly be no rate cut at all.” – Melissa Brown, Managing Director of Investment Decision Research at SimCorp

“Any lingering expectations that the Fed will cut another 50 bps at their next meeting should be erased after the September payrolls and now the CPI data. Screaming for faster relaxation A steady rate of 25 bps per appointment still feels prudent from here. Consumers may be fixated on the firmness of inflation in categories like food, while the Fed may finally start to show up. In any case, inflation has normalized. As such, the evolution of the Fed’s approach is unlikely to change its mindset on policy recalibration. – Elyse Ausenbaugh, Head of Investment Strategy at JP Morgan Wealth Management

“Although labor market risks were softer than expected, the Fed’s eventual approach to a soft landing encountered some challenges in September, with core price growth rising 3.3% year-over-year. However, these traps are expected to be only brief. long-term disruptions to the long-term disinflationary trend, meaning the Fed can still afford to cut interest rates and support labor market volatility while maintaining pressure on prices on its current rate-cutting schedule interest rates by 25 bps in both November and December.” – Noah Yosif, Chief Economist at American Personnel Association

“This morning’s CPI report beat expectations, complicating the Fed’s near-term plans for more interest rate cuts. Persistent inflation is most evident in shelters and transportation, some of the most difficult areas to tackle, while declines are mainly seen in energy and gasoline. If inflation continues to surprise higher, the Fed may delay further key rate cuts longer than previously indicated.” – Ben Vaske, Senior Investment Strategist at Orion Portfolio Solutions

“The hotter-than-expected inflation reported today is unwelcome news for the Federal Reserve, which cut rates by 0.5% last meeting and comes on the heels of a very strong September jobs report. Fed minutes released yesterday show there was considerable debate. whether to cut a quarter point or a half point, I suspect the Fed would have liked to have only cut by a quarter point given the recent data. – David Royal, Chief Financial and Investment Officer at Flourishing

“Fundamentally, however, the outlook for inflation remains benign. The drop in the layoff rate, below the level of 2019, and the decline in the number of jobs per unemployed over the past six months point to a further slowdown in wage growth going forward, which will Consequently, core CPI inflation looks set to return to 2.0% by in the fall of 2025, with core PCE inflation getting there a few months early, allowing the Fed to focus solely on stemming the easing trend. the labor market”. – Ian Shepherdson, Chairman and Chief Economist at Pantheon of Macroeconomics

“This number may not be as bad as it seems because housing has slowed sharply. This is important because housing costs have been the biggest persistent drag on inflation. It’s not great news overall, but it is unlikely to have much of an impact as the Fed is still early in its easing cycle, the days when the CPI triggered major volatility may fade.” – David Russell, Global Head of Market Strategy at TradeStation

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