CPI report suggests gradual pace of rate cuts: What the experts say

A slightly hotter-than-expected September CPI report keeps the Federal Reserve on track to gradually cut interest rates as the broader disinflationary trend in the U.S. economy remains on track, experts say.

Although headline inflation fell for the sixth straight month in September, reaching its lowest level since early 2001, the reading exceeded economists' expectations due to the stability of some subcomponents of the consumer price index.

As a reminder, the annual CPI slowed to 2.4% in September from 2.5% in the previous month Bureau of Labor Statistics. That exceeded economists' forecast for inflation to rise by 2.3%. More importantly, the core CPI, which excludes volatile food and energy costs and is considered a better indicator of future prices, rose 0.3%. That beat expectations for a 0.2% increase.

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The decline in annual inflation was supported by falling energy prices, while core inflation rose slightly, largely due to continued housing costs, notes Jim Baird, chief investment officer at Plante Moran Financial Advisor.

“At 2.4%, headline inflation is not particularly worrisome,” Baird writes, “especially since it has been well below 2% on an annual basis over the last six months — a pace that alone would suggest that the Fed is moving on. If anything, the report was good enough to strengthen the case for another quarter-point rate cut.

Although inflation has not fallen fast enough to justify accelerated policy easing, today's upside surprise “does not raise serious questions about the underlying disinflationary trend,” Baird adds.

A stunning September jobs report has already caused market participants to frantically recalibrate their bets on how quickly the Federal Reserve will normalize borrowing costs. The latest CPI report, while hot, seemed to merely confirm expectations of a 25 basis points (bps) or 0.25% cut at the next Fed meeting.

On October 10, futures traders estimated an 89% chance that the Federal Open Market Committee (FOMC) would cut the short-term federal funds rate by 25 basis points in November, up from 68% a week ago. According to CME Group, the probability of a 50 basis point cut has fallen to 0% from 32% last week FedWatch toolwhile the odds of the Fed standing still rose to 11% from 0% a week ago.

With the September CPI report now on the record, we reached out to economists, strategists and other experts to give us their thoughts on what the data means for markets, macroeconomics and monetary policy going forward. Below is a selection of their comments, sometimes edited for brevity or clarity.

Expert takes over the CPI report

CPI report on inflation

(Image credit: Getty Images)

“CPI inflation data was slightly higher, with non-energy commodity prices rising more than expected. The good news is that housing inflation is falling and this will drag inflation down. The big picture is that inflation continues to fall, albeit with some bumps along the way. – Sonu Varghese, global macro strategist at Carson Group

“September's CPI report came in a little hotter than expected, but nothing that we think will derail the Fed's plans to cut rates by 25 basis points in February. The relative strength of recent economic data suggests that the Fed may do less or slower. However, it still considers the normalization of interest rate policy to be restrictive and wants to maintain the delicate balance between a well-functioning economy and an economy that unnecessarily weakens the labor market. – Lauren Goodwin, economist and chief market strategist at New York Life Investments

“The September CPI report was stronger than expected, with core CPI in particular surprisingly positive. However, labor market data remains key for the Fed and we see next month's payrolls release as the more important data point in determining the pace and extent of the Fed's easing measures. – Whitney Watson, global co-head and co-chief investment officer of fixed income and liquid solutions Goldman Sachs Asset Management

“We maintain our call for a 25 basis point cut at the November FOMC meeting. Although the core CPI surprised positively for the second month in a row, it appeared to be driven by some volatile components, while the sticky shelter category saw significant disinflation. We think the FOMC will remain confident that the disinflation narrative is intact and that it will continue to view gradual easing of the federal funds rate as warranted at the next two meetings. We see the hurdle for the FOMC not to cut rates at the November meeting to be high given the 50 basis point cut at the September meeting.” – Pooja Sriram, US economist at Barclays

“The headline and core CPI numbers were slightly above consensus expectations. The difference — along with the stronger-than-expected recent jobs report — probably wasn't enough to prompt the Fed to back down from its view that inflation and employment are now “in balance.” However, these two data points appear to have increased the likelihood that the next cut will be no more than 25 basis points and there may not be a rate cut.” – Melissa Brown, managing director of investment decision research at SimCorp

“Any lingering expectations that the Fed would make another 50 basis point rate cut at its next meeting may have evaporated following the September payrolls data and now the CPI data. I'm crying out for faster easing, from here it still seems prudent for consumers to focus on the firmness of inflation in categories like food, while the Fed may welcome weaker inflation finally taking hold. In any case, it has inflation normalizes. Therefore, the evolution of the Fed's approach is unlikely to change its approach to rebalancing its policies. – Elyse Ausenbaugh, Head of Investment Strategy at JP Morgan Wealth Management

“While labor market risks were lower than expected, the Fed's final approach to a soft landing experienced some challenges in September as core price growth rose 3.3% year-over-year. However, these pitfalls are likely to be short-lived.” There are disruptions in the long-term disinflation trend, meaning the Fed can still afford to cut interest rates and increase labor market exodus while also keeping pressure on the Prices are maintained. With risks still focused on the labor market, the Fed is likely to stick with its current schedule of cutting interest rates by 25 basis points in both November and December. – Noah Yosif, chief economist of the American Personnel Association

“This morning's CPI report beat expectations and complicated the Fed's near-term plans for further rate cuts. Persistent inflation is most evident in accommodation and transportation, some of the most difficult sectors to manage, while declines are seen most notably in energy and gasoline. With inflation Since the US Federal Reserve remains surprisingly positive, the Fed could delay further cuts in its key interest rate for longer than previously announced.” – Ben Vaske, senior investment strategist at Orion portfolio solutions

“The stronger-than-expected inflation reported today is unwelcome news for the Federal Reserve, which cut interest rates by a full 0.5% at its last meeting, and follows a very strong jobs report in September. The Fed minutes released yesterday show that there was significant debate.” I suspect that given the recent data, the Fed would have wished it had only cut rates by a quarter point. – David Royal, Chief Financial and Investment Officer at Thriving

“In principle, however, the inflation outlook remains favourable. The decline in the churn rate below 2019 levels and the decline in the number of job vacancies per unemployed person over the last six months suggest that wage growth will continue to slow in the future, as will CPI inflation Accordingly, the service sector is expected to return to 2.0% by fall 2025, with core PCE inflation reaching this level a few months earlier, allowing the Fed to focus solely on arresting the slowdown in the U.S. labor market.” – Ian Shepherdson, Chairman and Chief Economist at Pantheon Macroeconomics

“This number may not be as bad as it looks because the number of shelters has fallen sharply. This is important because housing costs have been the biggest persistent problem for inflation. Overall, that's not good news, but it's also unlikely to have much of an impact as the Fed is still too early in its easing cycle. The days when the consumer price index caused major volatility may be over. – David Russell, global head of market strategy at TradeStation

CPI report suggests gradual pace of rate cuts: What the experts say

ByVanessa

By Vanessa

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