Markets enjoyed the better-than-expected November Consumer Price Index (CPI) report. The Fed, on the other hand, is less confident and expects interest rates to remain high for some time. They want more data before they are sure they are winning the inflation battle.
November’s CPI report offered 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 reverse in the coming months as other series show home prices starting to fall.
The market reaction was overwhelmingly positive. On the day of the November CPI announcement, the S&P 500 and Dow posted their best one-day percentage gains in more than two years. Interest rate futures suggested the Fed would raise rates by 0.5 percentage points at its December meeting. Ahead of the CPI numbers, market expectations were balanced between 0.5 and 0.75 percentage points.
However, the Fed has quickly played down any expectations that they will consider cutting rates soon. Dallas Fed President Logan said on Nov. 10, “This morning’s CPI data was welcome, but there is still a long way to go.” She continued: “Sufficient economic cooling will eventually return inflation to our target. But that process is just beginning. The labor market remains very tight, and wages continue to rise significantly faster than the rate consistent with 2 percent inflation. All this means that the Fed is less willing than financial markets to read too much into one encouraging inflation report.
In fact, Fed Governor Christopher Waller said as much in a speech in Australia on November 13, calling the November CPI report “just one data point”, saying inflation was “huge” and making it clear that rates were still rising.
There is a clear difference between the Fed’s and markets’ reactions to the November inflation report so far.
The Fed may be less inclined to resume its fight against inflation than the market suspects. Or maybe the markets are seeing more positive data that the Fed doesn’t want to speculate on yet.