US Core CPI Finally Eases, Rallying Bets for Fed to Cut Sooner

The US Consumer Price Index (CPI) report for December 2024 has finally brought some relief to investors, with core CPI easing to 0.2% from the previous four months of 0.3% increases. This development has sparked a rally in bets that the Federal Reserve will cut interest rates sooner than previously expected. The core CPI, which excludes volatile food and energy prices, is a key indicator that the Fed watches closely to assess underlying inflation trends.

The easing of core CPI can be attributed to several factors, including cheaper hotel stays, a smaller advance in medical care services, relatively tame rent increases, and moderation in food and energy prices. These factors combined to create a more moderate increase in core CPI, which came in at 0.2% for the month. This reading is in line with market expectations and has increased the likelihood of a Fed rate cut in December.

The market's reaction to the CPI data reflected investors' expectations for Fed policy. The odds of a 25 basis point rate cut in December rose to 82.3%, indicating that investors were pricing in a higher probability of a rate cut. Stock and bond prices also reacted to the changing interest rate environment, with the S&P 500 falling 0.1% and the 10-year Treasury yield falling to 4.41% from 4.43%.

The CPI data has implications for the Fed's decision on interest rates in January. With core CPI inflation steady at 3.3% last month, the Fed is widely anticipated to keep interest rates unchanged in January. The stable core CPI reading suggests that the Fed's efforts to bring inflation down to its target are on track. However, the incoming Trump administration's economic plans, which include new tariffs, tax cuts, and mass deportations, could reignite inflation, making it crucial for the Fed to maintain its current stance.

In conclusion, the easing of US core CPI in December has rallied bets that the Federal Reserve will cut interest rates sooner than previously expected. The market's reaction to the CPI data reflected investors' expectations for a more dovish Fed policy, which typically leads to higher stock prices and lower bond yields. The CPI data does not indicate a need for the Fed to adjust interest rates in January, but the incoming Trump administration's economic plans could pose a risk to the Fed's inflation target.