Markets liked the November Consumer Price Index (CPI) report which came in better than expected. In contrast, the Fed is less convinced, and expects rates to remain high for some time. They want more data before trusting that they will win the inflation fight.
The November CPI report offers encouraging signs that inflation may be easing. Food inflation has started to slow down and more and more categories are seeing price cuts. Housing costs continue to rise, but that is expected to change in the coming months as other series show home prices starting to fall.
The market reaction was clearly positive. On the day of the CPI announcement in November the S&P 500 and the Dow saw their best one-day gains in percentage terms in more than two years. Interest rate futures have moved to suggest the Fed will raise rates by 0.5 percentage points at its December meeting. Before the CPI numbers, market expectations were balanced between a 0.5 and 0.75 percentage point move.
A Cautious Fed
However, the Fed quickly downplayed any expectations that they would soon consider cutting rates. President Logan of the Dallas Fed said on November 10, “This morning’s CPI data is a welcome relief, but there is still a long way to go.” He went on to say that, “Sufficient cooling of the economy will eventually bring inflation back to our target. But this process is just beginning. The labor market remains very tight, and wages continue to grow much faster than the rate consistent with 2 percent inflation.All of this means that the Fed is less willing than financial markets to read too much into an encouraging inflation report.
In fact, Fed Governor Christopher Waller said in a speech in Australia on November 13, calling the November CPI report “just one data point”, saying that inflation was “very big”. and explained that the rates are still ongoing.
There is a clear difference between the reaction of the Fed and the markets to the November inflation report so far.
The hog guard may be less inclined to dial back his inflation fight than the market suspects. Or maybe markets see more positive data coming that the Fed isn’t willing to speculate.