One inflation report won’t change the trajectory of the markets or the Fed’s plans for the next 12 months, but it does serve as a reminder that the soft landing narrative isn’t locked in yet. The September CPI showed that inflation isn’t yet under control and the markets shouldn’t act like it is. Again, we’re talking about a number that came in 0.1% above expectations, but this along with the latest trends in both rent and services show that inflation appears to be at least flattening, if not turning higher again. As I laid out in my case earlier this week about the reasons why current conditions are looking more inflationary than disinflationary at the moment, I don’t see why the economy couldn’t be headed towards a scenario where inflation reheats in the first half of 2025 and derails all plans for which stock prices are currently rallying on.
Just recently, the futures market was pricing in roughly 75 basis points of additional cuts before the end of 2024. Today, there’s nearly a 20% chance that we get no rate cut at all in November, something that’s also been gaining support by the likes of Fed member Raphael Bostic. The odds of a terminal Fed Funds rate of around 3%, which seems to have been the Fed’s target just a matter of weeks ago, is looking like a much longer shot today. The markets have been rallying for a while now on the belief that the Fed will keep easing into an already healthy economic environment. The markets may soon get a lesson that there are consequences to getting too dovish at the wrong time.
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