In light of falling inflation, the Fed started lowering interest rates in September and then again this month. They also signaled they may be lowering rates again in December and possibly four times in 2025. JP Morgan, one of the Portfolio Strategists we utilize for client accounts, discussed in their Weekly Market Recap whether some recent economic data and events could put these plans in jeopardy…
In September, the Fed kicked off its cutting cycle because “the balance of risks” had shifted. But subsequent economic data and the election results could be shifting it back. This week’s chart shows both growth and the labor market are tracking stronger than the Fed expected, posing upside risk to inflation.
Core PCE has come down since 2022, but progress has stalled over the past few months. Both CPI and PPI rose solidly this month, increasing estimates for October PCE. Moreover, the housing inflation driving CPI is unlikely to alleviate anytime soon. The ~75bp sell-off in the U.S. 10-year since the first cut has pushed mortgage rates from 6.1% to 6.8%, and housing purchase activity remains near its lowest level since 1995.
While Powell stated at the November meeting “in the near term, the election will have no effects on our policy decisions,” investors are likely more concerned about the long term. Several of Trump’s top priorities are somewhat inflationary. Immigration restrictions could re-heat the labor market, stoking wage growth, and tariffs could increase prices. This, combined with a potential trade-war supply chain disruption, could reverse recent disinflation progress in goods.
Altogether, risk seems more skewed toward inflation than in September. December revisions to the dot plot should reflect this, but the Fed will likely stay the cutting course. However, markets are currently only pricing ~.7% of easing by the end of 2025, compared to .95% before the election and ~1.6% after the September meeting. Investors should be aware future easing could progress slower and end quicker than previously expected.
