Wall Street interprets CPI: No change to the Federal Reserve's "gradual easing," core inflation remains strong supporting a pause in rate cuts in January

On Wednesday, December 11, the U.S. Consumer Price Index (CPI) for November fully met expectations, reinforcing traders' predictions that the Federal Reserve will cut interest rates by 25 basis points next week, with a slight increase in bets for further cuts in January.

Data showed that the U.S. nominal CPI rose 0.3% month-on-month and 2.7% year-on-year in November, both up 0.1 percentage points from the previous values in October. This also marks the first time since March that the nominal CPI has accelerated in year-on-year growth for two consecutive months. The core CPI, excluding volatile food and energy prices, rose 0.3% month-on-month, marking the fourth consecutive month of 0.3% growth, while year-on-year growth remained steady at 3.3%.

However, analysts generally noted that this expected CPI data also demonstrated a stagnation in the cooling of inflation in recent months, with the core CPI remaining at a relatively high year-on-year growth rate of 3.3% for three consecutive months, far above the level consistent with the Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures Price Index (PCE), returning to the 2% target.

According to the FedWatch tool from the Chicago Mercantile Exchange (CME), after the CPI release, the futures market estimated the probability of a 25 basis point rate cut by the Federal Reserve next week at about 95%, up from 89% a day earlier. U.S. Treasury yields fell sharply from the day's high to the day's low, indicating that the latest data further strengthened rate cut expectations. However, the bets for continued rate cuts in January only slightly increased from 19% to 22%.

Inflation data does not change the Federal Reserve's path of "gradual easing in the new year," nor does it undermine the year-end bull market in U.S. stocks

Vital Knowledge analyst Adam Crisafulli stated that this year-end economic data is "crucial for next week's rate cut," but the outlook thereafter is less clear. He expects that the forward guidance in the Federal Reserve's meeting statement may show a "moderately hawkish shift," potentially keeping the January 2025 meeting on hold, and even pausing rate cuts in March.

Whitney Watson, co-head of global fixed income at Goldman Sachs Asset Management and co-chief investment officer, also believes that the core CPI inflation rate meeting expectations paves the way for a rate cut next week. The data did not heat up to a level that would alarm the market, allowing Federal Reserve officials to maintain confidence in the inflation cooling process as they enter the new year, with further gradual easing of monetary policy expected.

LPL Financial analyst Jeffrey Roach stated that wage growth is still outpacing inflation, putting U.S. consumers in a favorable position as they enter the new year. As the more challenging parts of inflation stabilize, the Federal Reserve may continue to cut rates slowly and steadily.

TradeStation's head of market strategy David Russell and U.S. Bank Asset Management senior investment strategist Tom Hainlin both expect that while inflation has stopped declining, it is not enough to undermine the bull market in U.S. stocks. The former particularly pointed out: "The catalytic effect of inflation and the Federal Reserve (on the market) is weakening, and attention may now shift to the new government's tariff policies."

Analysts say that the strong core CPI will raise concerns among the minority at the Federal Reserve about stagnant inflation, and a rate cut next week is not a certainty

A closer look at the CPI data reveals that the closely watched "owners' equivalent rent" index rose 0.23% month-on-month in November, the smallest increase since early 2021. However, overall housing costs remain the most stubborn part of rising inflation, accounting for nearly 40% of the CPI increase. The housing expenditure index rose 4.7% year-on-year in November.

At the same time, food, used cars, and healthcare were also major factors in the accelerated rise of the CPI in November compared to the previous month. Prices for both used and new cars reversed the recent trend of monthly declines, and according to the U.S. Bureau of Labor Statistics, "almost no major price components showed a decline."

In recent days, many Federal Reserve officials have expressed disappointment over "stubborn inflation," suggesting that if more progress is not made in cooling inflation, the pace of rate cuts entering 2025 may need to slow. If the Federal Reserve "unexpectedly" cuts rates by 25 basis points next week, the federal funds rate will have been reduced by a full percentage point (100 basis points) since September of this year.

Nick Timiraos, a well-known financial journalist referred to as the "new Federal Reserve correspondent," stated that the decline in core commodity prices over the past 18 months has largely driven the cooling of inflation, and "now, that situation has ended." For example, the rise in car prices in November pushed core commodity prices up 0.3% month-on-month, far exceeding the slight month-on-month increase of 0.05% in October and the month-on-month increase of 0.17% in September.

Anna Wong, head of Bloomberg Economics, pointed out that the strong core CPI inflation in November will raise concerns among the minority at the FOMC, who worry that the cooling of inflation has stalled, making a rate cut next week uncertain:

"Admittedly, housing rent inflation has finally eased, but commodity prices have lost their deflationary momentum. The current monthly inflation rate is consistent with an annual inflation rate exceeding 3%, rather than aligning with the Federal Reserve's 2% target."

Bloomberg interest rate strategist Ira Jersey stated that inflation is now closely related to the service sector, and although potential new tariff policies may elevate commodity inflation for a while, the current drivers of inflation have not changed:

"As service sector inflation continues to grow at an annual rate of 4.5%, core inflation is unlikely to reach the Federal Reserve's target in the short term."

The 10-year U.S. Treasury yield rebounded in a V-shape, returning to the day's high in the U.S. stock market's closing, rising about 6 basis points intraday, reaching a two-week high. The two-year U.S. Treasury yield, sensitive to interest rates, also slightly rose after having previously dropped nearly 5 basis points following the CPI data release.

Wall Street Consensus Expects the Federal Reserve to Pause Rate Cuts in January Next Year, with Attention on Potential Inflationary Risks from Tariffs

Brian Coulton, Chief Economist at Fitch Ratings, also stated that the decline in core commodity prices has been an important component of the overall cooling of inflation this year, and this trend seems to have ended:

"With rising car prices, core commodity prices increased by 0.3% month-on-month in November. While inflation in the service sector is declining, it is doing so very slowly, as rent inflation remains stubbornly high at 4.6%, still well above pre-pandemic inflation levels."

Currently, the mainstream expectation on Wall Street is that the Federal Reserve will pause rate cuts in January:

CIBC Capital Markets analyst Ali Jaffery believes there are still doubts about the extent of rate cuts in 2025. If economic growth does not slow down or overall price pressures do not further cool, the threat of pausing rate cuts and extending the easing cycle is intensifying.

Richard Flynn from Charles Schwab's UK division pointed out that several Federal Reserve officials have expressed dissatisfaction with the pace of cooling inflation, and the November CPI data has not reassured people. This may lead the Federal Reserve to act cautiously, pausing rate cuts to avoid increasing price pressures.

Pepperstone analyst Michael Brown stated that the risks to the monetary policy outlook in the first quarter of next year will become increasingly two-sided, as Federal Reserve officials are primarily concerned about the potential inflationary risks from Trump's tariff plans and the broader "reflation" fiscal policy stance, with strong demand potentially further exacerbating price pressures