Dow, S&P 500 rise while Nasdaq lags as inflation print keeps Fed rate cut on track

New data out Wednesday showed the “core” Consumer Price Index (CPI) increased 3.3% in the month of October, in line with Wall Street’s expectations.

Immediately following Wednesday’s release, markets continued to price in another 25 basis point rate cut in December after the central bank cut rates by that amount last week. Traders currently see a more than 80% chance that the Fed cuts rates by 0.25% next month, up from just under 60% on Tuesday, according to data from CME’s FedWatch Tool.

But there were further signs of stickiness in Wednesday’s release, reminding investors that inflation’s final chug down to the Fed’s 2% target is proving bumpy. This can be seen in our chart of the day, where the three-month annualized rate of inflation moved from 3.1% last month to 3.6% after the October CPI release.

Nationwide’ chief economist Kathy Bostjancic wrote in a note on Wednesday that this trend could make the December meeting a “closer call” than prior meetings.

And looking further ahead, the shaky three-month trend is part of the reason markets have been moving to price in fewer Fed rate cuts in the first half of 2025. As of Wednesday, markets were pricing in two Fed rate cuts by the end of June, down from four seen in early November.

“The inflation data over the past few months have not shown much additional progress, and the election outcome has raised new questions about the path ahead for price growth,” Wells Fargo senior economist Sarah House wrote in a note to clients. “We think the time is fast approaching when the FOMC will signal that the pace of rate cuts will slow further, perhaps to an every-other-meeting pace starting in 2025.”