U.S. stocks and cryptocurrency markets fell on the eve of tonight’s CPI data release, as the market awaits the results of this indicator to gauge the Federal Reserve’s interest rate cut pace. Minneapolis Federal Reserve President Neel Kashkari pointed out that if inflation unexpectedly rises in the coming month, the Fed may reconsider its decision to cut rates in December.
(Background: Bitcoin’s challenge of $90,000 failed as it “dropped below $88,000”; former Fed hawk: rate cuts may decrease after Trump takes office; U.S. stocks fell across the board.)
(Additional context: The U.S. September CPI was “higher than expected,” intensifying inflation concerns! Fed officials: November is not necessarily a month for rate cuts.)
All four major U.S. stock indices declined on Tuesday, and Bitcoin also failed to set a new high, halting just below the $90,000 mark. The market seems to be digesting the rapid rise following Trump’s election victory while awaiting tonight’s CPI data to assess whether the Federal Reserve (Fed) will cut rates again this year, with market sentiment generally in a wait-and-see mode.
Yesterday (12), Neel Kashkari stated at an investment conference hosted by Yahoo Finance that if inflation unexpectedly surges in the coming month, the Fed might reconsider a rate cut at its December meeting. He noted that the market currently anticipates that the U.S. October CPI year-on-year growth rate will reach 2.6%, up from 2.4% in September; the month-on-month growth rate is expected to be 0.2%, unchanged from the previous month. The core CPI, excluding food and energy, is projected to have a year-on-year growth rate of 3.3% and a month-on-month growth rate of 0.3%, both consistent with prior values. Due to rising housing costs, core inflation has remained persistently high.
In response, Kashkari stated that housing inflation is “a significant ongoing issue,” but he believes the situation will improve as new leases are signed at lower prices. Regarding the potential impact of Trump’s presidency on the Fed’s interest rate decisions, Kashkari indicated that they can only wait and see. However, he expressed skepticism regarding the inflation that Trump’s new tariff policies might trigger, emphasizing that “everything right now is just speculation.”
During the campaign, Trump’s proposed comprehensive tariffs, tax cuts, and large-scale deportation of illegal immigrants could exert new pressure on inflation and further widen the U.S. fiscal deficit. The market generally anticipates that these policies will complicate the Fed’s ability to cut rates. This is because tariffs typically raise the costs of imported goods, while tax cuts may stimulate consumption, both of which could drive prices upward. Additionally, deporting illegal immigrants may reduce labor supply, increasing wage costs and consequently leading to higher inflation. Due to these proposed policies, many economists have lowered their expectations for the frequency and pace of rate cuts next year.
Fewer rate cuts expected in 2025
Former Cleveland Fed President, hawk Loretta Mester, stated at UBS’s annual European conference in London yesterday that the economic policies Trump may implement after taking office, particularly global tariffs, could affect the number of Fed rate cuts next year, which is unlikely to be as frequent as the market predicted in September. According to a Reuters survey, the market expects the Fed to cut rates by 1 percentage point in the first half of 2025 and another 25 basis points in the second half, with the federal funds rate potentially falling to 3%-3.25% by the end of 2025, slightly below the median forecast in the central bank’s dot plot.
Mester anticipates that the Fed may cut rates fewer than four times next year, but a 25 basis point cut could still occur at the December meeting. She noted that policymakers may gain a “preliminary understanding” of the impact of Trump’s fiscal policies on monetary policy, with specific details expected to become clearer early next year.
Barkin: Fed is well-positioned to respond to various economic scenarios
Richmond Fed President Thomas Barkin stated at an event in Baltimore that “given the current good state of the economy, interest rates have moved away from recent peaks, but also from historical lows, allowing the Fed to respond appropriately regardless of economic developments.”
Barkin considered two potential economic scenarios:
As election uncertainty diminishes, businesses may restart investment and hiring, allowing the Fed to focus on the upward risks of inflation.
Conversely, businesses may resort to layoffs due to weakened pricing power and compressed profit margins, increasing the employment risks faced by the Fed.
