Wall Street comments on CPI: A rate cut next month is basically certain, but the pace of rate cuts next year may slow down due to Trump’s policies

The U.S. Bureau of Labor Statistics released data on Wednesday showing that the year-on-year CPI in the U.S. rose to 2.6% in October, reaching a three-month high and ending a "six-month decline." The month-on-month increase was 0.2%, while the core CPI rose 0.3% month-on-month, both in line with expectations. Wall Street analysts stated that the expected CPI data almost guarantees that the Federal Reserve will lower interest rates next month, but the market still needs to assess the impact of inflation under the next President Trump, which may lead the Fed to slow down its rate cuts next year.

New Federal Reserve Communications: Leaving Room for Rate Cuts Next Month

Nick Timiraos, a reporter for The Wall Street Journal known as the "Federal Reserve Communications Agency," wrote that the October CPI data provides room for Federal Reserve officials to cut rates at next month's meeting, and the market quickly increased its bets on a rate cut in December.

At last week's press conference, Fed Chairman Jerome Powell hinted that the Fed is prepared to respond to higher-than-expected CPI data or "volatility." However, he also expressed confidence in the prediction of a gradual decline in the 12-month inflation rate.

Powell no longer believes that wage growth is the reason for the resurgence of inflation. He thinks that the residual stickiness of certain prices reflects the lagging effects of earlier price increases rather than new sources of price pressure. For example, rents in the CPI are still growing at historically high rates, but the rent increases for new apartments have been relatively moderate for over a year. This indicates that some existing leases are "catching up" to the trend that did not rise as much as new leases a few years ago.

Powell stated, "This is just a catch-up issue and does not truly reflect current inflation pressures, but rather reflects past inflation pressures. Clearly, we have not declared victory yet, but we believe that the trend of inflation continuing to decline along a volatile path is very consistent with this situation. This trend remains unchanged, and good or bad data over one or two months will not really alter the current pattern."

Wall Street: Need to Observe Inflation Trends After Trump's Presidency

Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, stated,

"The CPI data was not surprising, so the Fed should plan to cut rates again in December. However, next year may be different, given the uncertainties brought by potential tariffs and other Trump administration policies. The market is already considering that the number of rate cuts by the Fed in 2025 may be fewer than previously expected, and it may hit the pause button as early as January."

Baird Investment Strategist Ross Mayfield:

"The risk is that inflation data will be higher than expected, which would force the Fed to reconsider its rate-cutting cycle. The market is already very sensitive to the possibility of rising inflation under the Trump administration in 2025. Therefore, the CPI meeting expectations allows the market to breathe a sigh of relief and shift its focus to other factors recently affecting the market. Any inflation data that exceeds expectations would disrupt the current narrative that the Fed will continue to cut rates, which would be positive for risk assets."

Guggenheim Investments Economist Matt Bush:

"There is no data indicating that inflation is re-accelerating or rebounding. Therefore, the market's reaction of relief in maintaining stable inflation or even a slight month-on-month decline is evident."

"When the 10-year U.S. Treasury yield approaches 4.4% or 4.5%, we will see more buyers entering the market. When the yield pushes above 4%, it will only start to have a real impact on the broader economy if these rates remain unchanged. We believe that in the coming months, yields will stay within the range of 4% to 4.75%."

"A large part of the rise in yields reflects the resilience of the economy and strong growth, indicating that the Federal Reserve does not need to cut rates significantly as previously expected to support an economic slowdown. Recent data suggests that economic growth has stabilized, making this growth sustainable. However, there is significant uncertainty surrounding this view, especially considering potential policy changes after the election. The market is currently making assumptions in many areas, and no one really knows what the situation will be like in one or two years."

Seema Shah, Chief Global Strategist at Principal Asset Management:

"Given the market's concerns about Trump's policies leading to inflation, today's market seems prepared for inflation data to exceed expectations. Higher-than-expected inflation numbers could have allowed the Federal Reserve to remain on hold at the next meeting, so data meeting expectations can almost be seen as an outperforming performance. A rate cut in December is still on the agenda."

"However, because the Federal Reserve is already very cautious about the risks of price pressure resurgence, especially in the context of a persistently strong U.S. economy and Trump's policy agenda, the Federal Reserve will need to proceed with caution. It is expected that by early 2025, the Federal Reserve may slow the pace of rate cuts, rather than cutting rates at every meeting, opting instead for every other meeting."

Quincy Krosby, Chief Global Strategist at LPL Financial:

"All components of the CPI met expectations, which relieved the Treasury market, causing the 10-year yield to decline slightly."

"Stock futures rose slightly, but with the stock market having performed strongly for several consecutive days, the current focus is on Treasury yields, as concerns about stubborn inflation continue to dominate headlines."

"Although the 2.6% year-on-year data met expectations, it may keep the Federal Reserve vigilant and not eager to declare victory in controlling inflation."

Brian Jacobsen, Chief Economist at Annex Wealth Management:

"The data met expectations, but the details suggest there may be signs of further improvement in the future. Durable goods prices fell 2.5% year-on-year, and non-durable goods prices fell 0.5%. Service sector inflation remains significantly positive but is no longer accelerating.

The inflation risks posed by tariffs, deficits, or changes in immigration remain uncertain for now, and unless we receive more details about what might happen, there is no need to worry too much."