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U.S. inflation rose to 2.7% last month, in line with Wall Street expectations and paving the way for an expected Federal Reserve rate cut next week.
Wednesday’s numbers released by the U.S. Bureau of Labor Statistics were in line with expectations of economists polled by Bloomberg. However, that itself was higher than October’s 2.6%, which showed an increase from the previous month.
An analysis of market prices shows investors now have a 98% chance of seeing a 15-minute rate cut in December, up from less than 90% before the latest inflation data was released.
Brian Levitt, global market strategist at Invesco, said the number is “very much within the Fed’s comfort zone and supports a rate cut at its next meeting.”
A quarter-point cut next week would take interest rates to a new target range of 4.25-4.5%.
But next year’s trajectory is less uncertain as the central bank grapples with the dual mandate of keeping inflation close to 2% and maintaining a healthy labor market.
“The Fed will probably be on the sidelines after December,” said Ajay Rajadhyaksha, global research chairman at Barclays, noting that expected rate cuts next week would force the central bank to cut borrowing costs by 100 basis points. .
He added: “The situation could change quickly if the labor market collapses, but so far we don’t see many signs of that happening.”
U.S. stocks opened higher, with the benchmark S&P 500 index up 0.6% and the tech-heavy Nasdaq Composite Index up 0.9%.
In the government bond market, the policy-sensitive two-year US Treasury yield (inversely proportional to price) fell 0.05 percentage point to 4.1%.
The dollar edged back its gains so far, gaining 0.1% against a basket of six other currencies.
On a monthly basis, headline and core inflation, which subtracts food and energy prices, rose 0.3% in November, data on Wednesday showed.
On an annual basis, core inflation rose by 3.3%.
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Fed officials have discussed slowing the pace of rate cuts as they reach a more “neutral” setting, where rates are high enough to control inflation but low enough to protect the labor market. .
They argue that cutting rates too early could prevent inflation from moving beyond the 2% target, but cutting rates too late risks causing unemployment to rise sharply.
Chairman Jay Powell also suggested last week that a strong economy means the central bank “can afford to be a little more cautious” in cutting interest rates.
The latest jobs report also showed that job growth rebounded sharply in November after being dragged down by hurricanes and strikes the previous month.
However, the unemployment rate rose to 4.2%, suggesting the labor market acceleration was not strong enough to risk a resurgence of inflation.
Some officials in the outgoing Biden administration have expressed concern that President-elect Donald Trump’s policies could hurt the economy after he returns to the White House next month.
Treasury Secretary Janet Yellen said this week that President Trump’s proposed steep tariffs could “derail” progress in curbing inflation.
“(Tariffs) could negatively impact the competitiveness of some sectors of the U.S. economy and significantly raise costs for households,” he said at an event hosted by the Wall Street Journal.
