In December, inflation, as measured by the Consumer Price Index (CPI), remained steady with a 2.7% annual increase, consistent with the previous month’s figures. This steady inflation rate contributed to a market consensus that, while conditions are stable, inflationary pressures have not eased sufficiently to warrant an immediate reduction in interest rates by the Federal Reserve.
Within the broader inflation measurements, the "super core" category, which excludes housing costs from core services inflation, showed some moderation by declining to 2.76% from earlier elevated levels. However, as noted by Jeffrey Roach, Chief Economist at LPL Financial, the month-over-month pace remains modestly elevated, suggesting inflation is "a bit too hot" to justify a prompt rate cut.
Given these inflation dynamics, Roach anticipates that the Federal Reserve will likely pause any rate changes during its upcoming January meeting. He suggests that, with risks shifting primarily towards weakening labor market conditions, the environment might become conducive for a rate cut as soon as April. Supporting this perspective, Eric Teal, Chief Investment Officer at Comerica Wealth Management, forecasts inflation to maintain a range-bound pattern, fluctuating between 2.2% and 2.7% for the foreseeable future.
The stability in inflation figures has solidified market expectations that the Federal Reserve will hold interest rates steady when it convenes on January 28. Taking a stance in this context, Charlie Bilello, Chief Market Strategist at Creative Planning, endorses the Fed’s decision to refrain from cuts amid rising political pressures to lower borrowing costs for economic stimulus.
Bilello emphasizes the importance of maintaining central bank independence, warning against caving to political influence. He argues that when interest rates are dictated by external, political forces rather than the free market forces of supply and demand, it effectively amounts to "price controls." Such price fixing, he cautions, disrupts capital allocation, fosters asset bubbles, and contributes to volatile economic cycles characterized by sharp expansions and contractions.
Addressing anticipated dissent from various quarters expecting or demanding rate reductions, Bilello remarks, "There’s going to be a lot of people complaining in 2 weeks when the Fed doesn’t cut rates. Let them." Reinforcing his argument, he clarifies that price controls, regardless of whether applied to rent, oil, or interest rates, tend not to be effective remedies for economic challenges.
Reflecting these sentiments, the CME Group’s FedWatch tool indicates a 97.2% probability that the Federal Reserve will leave interest rates unchanged in the January policy meeting.
In response to the prevailing economic and policy uncertainty, broad equity markets have exhibited cautious trading behavior. On Tuesday, the SPDR S&P 500 ETF Trust (NYSE: SPY), which tracks the S&P 500 index, closed down 0.20% at $693.77. Similarly, the Invesco QQQ Trust ETF (NASDAQ: QQQ), representing the Nasdaq 100 index, declined 0.15% to $626.24. Market futures for the S&P 500, Nasdaq 100, and Dow Jones Industrial Average showed further downward trading on Wednesday.
This measured market reaction highlights investor wariness as the Fed’s monetary policy path remains a significant driver of sentiment, particularly amidst political calls for easing that have yet to alter official positions.