Cooling inflation will allow the Federal Reserve to forgo any more interest rate hikes and indeed to start cutting rates by May, traders bet on Tuesday, after a U.S. government report showed consumer prices for October were unchanged compared with the prior month.
Prices of futures contracts that settle to the Fed's target rate were pricing in only about a 5% chance the Fed will raise its policy rate any higher than the current 5.25% to 5.50% range.
They had reflected as much as a 28% chance of a rate hike by January before the Labor Department report, which showed the consumer price index rose just 3.2% from a year earlier, after rising 3.7% in September. Energy prices - a key pain point for consumers - were down 2.5% in October from September.
Core inflation, which excludes energy and food, rose 4% from a year earlier, the slowest pace in more than two years. While still well above the Fed's 2% target, the trend downward may give Fed policymakers more confidence that policy is tight enough to do the job.
Traders and many analysts certainly felt so.
"You can say goodbye to the rate hiking era," said Brian Jacobsen, chief economist at Annex Wealth Management.
J.P. Morgan Economist Michael Feroli, in a note to clients, said already low odds of a December rate hike have been further diminished by the CPI data, and he noted the numbers could also affect central bank forecasts due for release at the next Federal Open Market Committee meeting.
Feroli said with data pointing to fourth-quarter inflation moving under where the Fed thought it would be at the September FOMC and unemployment a touch higher, "it may be tough for them to justify offsetting a dovish hold with more hawkish dots."
At the September Fed meeting Fed officials had penciled in one more increase in the federal funds rate, an increase they are now quite unlikely to deliver.
Meanwhile, the Fed is now seen as more likely than not to deliver its first rate cut in May, and end 2024 with the short-term benchmark rate a full percentage point lower than today, based on rate futures pricing.
The Fed last raised rates in July, but Fed Chair Jerome Powell as recently as last week said he would not hesitate to raise rates further should it be needed to beat inflation back.
Tuesday's data lessens the pressure for further tightening, but U.S. central bankers aren't likely to take a victory lap yet, according to Nationwide Chief Economist Kathy Bostjancic.
"The Fed for now will maintain its tightening bias, erring on the side of caution," she wrote.
When policymakers next meet in December, they will have in hand a report on this month's inflation, as well as a more recent read on the job market, which also cooled last month more than economists had anticipated, with the unemployment rate ticking up to 3.9% and wages rising at the slowest pace in nearly 2-1/2 years.
