Are we about to kiss rate cuts goodbye?
Core CPI just came in at 3.3% last month, compared with a year ago. The Fed's target is 2%. Granted, CPI runs a bit hotter than their preferred inflation gauge, but we're still nowhere near target right now.
In fact, core inflation has been heating up. Core CPI is running 3.6% annualized over the past three months. And with the labor market still doing okay, there's little reason to expect broad "slack" to return and pull prices down across the economy. Stickiness in rents and other areas is also still persistent. Grocery prices, as Piper Sandler's Nancy Lazar points out, are now up 28% since Covid. Ouch.
In fact, Lazar's gauge of "needs" inflation (think medical care, rent, daycare, phone and internet bills) is still running a hot 4.7% year-on-year, versus just a 1% gain in her "wants" basket, comprised of more discretionary purchases. Which would explain why consumers are still feeling squeezed even as the overall economy has held up better than feared.
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This all raises the question of whether the Federal Reserve is actually going to cut rates again in December. Markets are acting like they will--in fact, the odds of a December cut rose slightly after the CPI report came in roughly as expected. The 10-year Treasury yield is roughly unchanged this morning at around 4.4%, but it had already backed up for several days into this print.
And again, we can all slice and dice this data each month and torture it to death, but what are the other signs in the economy telling us? If core CPI is running hot, Bitcoin is at $91,000, and stocks are basically at all-time highs, is the Occam's razor explanation quite simply that monetary policy is too loose?
It sounds crazy with a 4.6% overnight Fed Funds rate, but we are also running a $2 trillion deficit in a full-employment economy. And if Powell needs to slam the brakes on rate cuts right as President Trump takes office, the fireworks could be spectacular.
Money Report
In fact, if there's anyone who can give Powell some breathing room right now, it might actually be Elon Musk and Vivek Ramaswamy. Some real fiscal austerity would be another way to take the heat out of things here.
Kelly
