CPI : Inflation Meets Expectations as Fed Eyes Trump’s Trade Policy Shift

CPI : Inflation Meets Expectations as Fed Eyes Trump's Trade Policy Shift 

Today's CPI report landed exactly on target, with numbers that met expectations across all key metrics. This in-line result initially led to a somewhat muted market reaction, leaning dovish as investors reacted positively to a significant drop in Supercore CPI from September. Despite this, the overall inflation narrative remains mostly unchanged. The Federal Reserve's next steps will largely hinge on the trajectory of trade policy under former President Trump, should his new administration implement significant tariffs. As a result, the early enthusiasm around this dovish CPI report is likely to fade as ongoing uncertainties around global trade continue to weigh on market sentiment. This may lead to increased pressures on supply chains worldwide, especially if Trump's economic agenda includes a substantial increase in tariffs.

While today's inflation report itself may not carry substantial weight for future economic policy, it still offers insight into how the Federal Reserve might view economic stability within the broader context of potential shifts in trade policy. We now turn to several experts across Wall Street to gauge the impact of this report on inflation expectations and the outlook for monetary policy.

Lael Brainard, currently serving as the White House National Economic Adviser, commented that today's report indicates CPI inflation has nearly returned to its pre-pandemic baseline. Brainard emphasized the administration's ongoing efforts to reduce costs in critical areas like housing and healthcare. She also stressed the importance of opposing policies that could slow inflation's decline, underscoring the administration's commitment to lowering prices for American families.

Brian Coulton, chief economist at Fitch Ratings, noted that achieving the Fed's 2% inflation target has proven to be a slow journey, particularly as airline prices continue to climb. Coulton pointed out that the persistence of high rental inflation remains a problem that many forecasters, including the Fed, seem to have underestimated. His analysis suggests that these "sticky" costs in essential services are proving challenging to control.

From a market perspective, Lindsay Rosner, head of multisector fixed income at Goldman Sachs Asset Management, observed that today's CPI data aligns with expectations, leaving the Fed on a path to potentially cut interest rates in December. Rosner pointed out that while autumn's economic data has been unusually robust, today's report provides some reassurance that rate cuts may proceed at a steady pace. However, given the lingering uncertainties in fiscal and trade policies, Rosner believes the Fed might slow the pace of easing in early 2025 as economic headwinds grow.

David Russell, Global Head of Market Strategy at TradeStation, took a more bullish stance, arguing that concerns about inflation and the Fed's policy trajectory should take a backseat as markets continue their positive momentum. Russell suggests that December is still in play for a rate cut and believes that, with today's inflation numbers doing little to alter market fundamentals, investor focus will soon turn to the policies of the incoming administration.

CIBC Capital Markets' Katherine Judge anticipates that inflation in core services, excluding housing, will remain contained as slack builds in the labor market. Judge foresees inflation reaching the Fed's 2% target by mid-2025, indicating that core services could act as a stabilizing factor for the broader inflation outlook in the medium term.

Seema Shah, chief global strategist at Principal Asset Management, warned that given the ongoing strength of the U.S. economy, the Fed will need to exercise caution when navigating inflationary pressures. According to Shah, the Fed may slow its rate cuts in 2025, reducing the frequency of adjustments as the year progresses. With the potential for significant fiscal changes under a Trump administration, the Fed might find itself pausing more often to gauge the impact of these policies on inflation.

Richard Flynn, managing director at Charles Schwab UK, offered a geopolitical perspective, noting that the recent election has introduced new uncertainties into the economic outlook. Flynn advises close monitoring of potential policy shifts, including tariffs, immigration, and tax changes, under Trump. He suggests that while today's CPI report may not heavily influence the Fed's immediate rate decisions, broader shifts in policy direction could impact the Fed's long-term strategy.

Gregory Faranello, who leads U.S. rates trading at AmeriVet Securities, sees today's CPI as a moment of relief for the market, allowing bond yields to retest last week's lows around 4.3% on the 10-year U.S. Treasury note. He suggests that current market behavior could indicate potential reversal patterns, although he believes there's still room for the market to push toward higher yields.

Skyler Weinand, Chief Investment Officer at Regan Capital, added that with the election now resolved and potential fiscal policy changes on the horizon, the Fed may adopt a more cautious approach to interest rate adjustments. Weinand anticipates that the Fed may enter a "wait-and-see" phase as it evaluates the inflationary effects of the Trump administration's economic policies.

Jeffrey Roach, chief economist at LPL Financial, highlighted that the persistence of inflationary pressures in certain sectors, particularly consumer spending, continues to be a driving force in the inflation outlook. According to Roach, robust economic growth has kept bond yields high, adding a degree of complexity to the Fed's decision-making process. Although the Fed may still cut rates in December, Roach expects a likely pause in early 2025 as inflation remains sticky in specific components.

Florian Ielpo from Lombard Odier believes that even a terminal rate around 4% could help to gradually relieve inflationary pressures. However, Ielpo cautions that without core inflation dropping below 3%, the Fed may face difficulty in moving toward a more aggressive rate-cutting stance, especially if Trump's administration pushes for inflationary fiscal measures.

Anna Wong, chief economist at Bloomberg Economics, provided a final perspective, stating that October's CPI report remains consistent with recent trends: inflation has neither accelerated nor cooled significantly. Wong highlighted that seasonal factors in core goods, like used car prices, have slowed inflation's decline. She predicts that core goods prices should remain stable in the medium term, especially in light of elevated inventory levels and higher interest rates on car loans. Wong also pointed out that disinflation remains broad outside of the automotive sector, though a looming Producer Price Index report due on November 14 may prompt additional scrutiny if certain service categories experience unexpected price growth.

In conclusion, today's CPI report may not be a major turning point for inflation, but it has provided insight into the possible trajectory of the Federal Reserve's policy adjustments. The Fed is likely to cut rates again in December, yet several experts caution that the pace of easing could slow in the new year if trade policy shifts spark renewed inflation concerns. As Wall Street continues to digest the implications of potential tariff increases and fiscal policies, today's CPI numbers underscore the ongoing balancing act faced by policymakers aiming to sustain economic growth while managing inflation expectations in a complex global environment.