November CPI gives Fed ‘green light’ for December rate cut, say asset managers

November’s inflation data met expectations, and confirms the market consensus of another 25-basis point rate cut by the Federal Reserve when it meets next week, said Josh Hirt, senior U.S. economist at Vanguard.

“We are still closely monitoring the strength of the labor market and potential stickiness of certain components of inflation (shelter, services) heading into 2025,” Hirt added. Vanguard has $10.1 trillion in assets under management.

Skyler Weinand, chief investment officer at Regan Capital, with $2.1 billion in AUM, also thinks the latest CPI figure gives the Fed the “green light” for a December rate cut.

(The inflation data "helps to confirm that we are still making progress on inflation even though it remains sticky,” Weinand said. “Recent economic data on both inflation and jobs paves the way for the Fed to cut interest rates by three or four times in 2025, but probably not more than that.”

Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, also anticipates a December rate cut as well as “further gradual easing in the new year.” GSAM has $3.1 trillion in assets under supervision.

The Bureau of Labor Statistics reported on Dec. 11 that the consumer price index rose an annualized 2.7% from a year ago in November -- above the 2.6% figure recorded in October – and matching expectations.

Economists were expecting a 2.7% annualized CPI figure for November, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 3.3% in November, the same pace as reported in the prior month.

The Fed has considered the inflation rate a key factor in its monetary policy decisions. The Fed’s key short-term interest rate is currently in a range of between 4.5% to 4.75%, after the central bank reduced rates by 25 basis points at the Nov. 7 meeting, the second straight rate cut by the central bank.

As of Dec. 11, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 96.4% probability that the Fed will cut rates by 25 basis points when it issues its next monetary policy decision on Dec. 18, and only a 3.6% probability it will keep rates steady.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, commented that the November CPI numbers should be “risk-asset friendly and provide a tailwind to equity markets as we move through one of the strongest seasonal periods of the year.” ClearBridge has $193.3 billion in AUM.

However, Lara Castleton, U.S. head of portfolio construction and strategy at Janus Henderson Investors, sees a conflicting dynamic shaping up for next year.

“The labor market continues softening, as shown with the latest data, but recent upticks in inflation will make it hard for the Fed to guarantee a straightforward continuation of rate cuts in 2025,” she said.

“Reignition of inflation is one of the top concerns for clients next year, particularly surrounding uncertainty of policy proposals in the next administration, and while this (November CPI data) shouldn’t force that reality to interrupt the holiday season, investors should be weary of impacts higher inflation might have on their portfolios and be prepared accordingly.” Janus Henderson Investors has $382.3 billion in AUM.