October CPI suggests December rate cut, but future easing pace may slow — asset managers

An October inflation figure met market expectations and may lead the Federal Reserve to make another rate cut at its next meeting in December, but it could spur the the central bank to take a breather on further cuts next year, asset managers said.

“After a run of unseasonably 'hot' autumn data, today’s number cools fears of an imminent slowdown in the pace of rate cuts,” said Lindsay Rosner, head of multisector fixed income investing at Goldman Sachs Asset Management, which has $3.1 trillion in assets under supervision. “Still, with uncertainty over fiscal and trade policies high, there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in.”

The Fed may have only one rate cut left in December before taking a pause from its easing path, said Skyler Weinand, chief investment officer at Regan Capital, which has $1.9 billion in assets under management.

The market has "walked itself back" from pricing in eight cuts over the next year to fewer than four, Weinand said. “With the election behind us and the incoming administration’s fiscal policies painting a picture that may lead to increased inflation, the Fed will soon enter ‘wait-and-see’ mode when it comes to interest rate decisions.”

The Bureau of Labor Statistics reported on Nov. 13 that the consumer price index rose an annualized 2.6% from a year ago in October, above the 2.4% figure recorded in September. The Fed's target is 2%.

Economists were expecting a 2.6% annualized CPI figure for October, 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 October, 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 the morning of Nov. 13, 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 78.9% probability that the Fed will cut rates by 25 basis points when it issues its next monetary policy decision on Dec. 18, and a 21.1% probability it will keep rates steady.

Mark Heppenstall, CIO at Penn Mutual Asset Management, noted that the “most troubling part” of the latest inflation report for Fed policymakers was the year-over-year core CPI reading of 3.3%, the fourth consecutive such increase. “The Fed will likely require more favorable numbers in next month’s CPI report to follow through with another rate cut at its December meeting,” he added.
Penn Mutual has $38 billion in AUM.

Josh Jamner, investment strategy analyst at ClearBridge Investments, which has AUM of $193.3 billion, commented that while “substantial progress” has been made in the fight against elevated inflation, the “last mile” is proving more challenging. He noted that the November CPI data released on Dec. 11, a week prior to the next Fed meeting, should have a greater impact on the Fed’s decision.