INFLATION WATCH sends Wall Street on a ride. Does Fed get scared?

After a soft jobs report, and other tepid economic data in recent months, today’s release of the Consumer Price Index update for August would give an indication as to whether inflation had stayed under control as Summer wound down, and if the Federal Reserve might do a sizable cut of interest rates when it meets next week.

When the numbers came down, it showed inflation staying low overall, but not in all areas.

CPI (main gauge of prices at the retail level):
Headline: UP 0.2% month, UP 2.5% year-over-year.
Core: UP 0.3% month, UP 3.2% yr./yr.
Food: UP 0.1% month, UP 2.1% yr./yr.
Energy: DN 0.8% month, DN 4% yr./yr
Shelter: UP 0.5% month, UP 5.2% yr./yr
CPI UP 21% since Jan. 2020 (see… pic.twitter.com/r1WQZp2nhF

— Mark Hamrick (@hamrickisms) September 11, 2024

The number that got attention from the financial media was the 0.3% (actually 0.28%) increase in the core CPI. Wall Street sheep traders decided that this core stat meant the Federal Reserve was only going to cut by 25 basis points next week, and sold off hard in the morning.

Then things reversed throughout the afternoon.

A rally in the world’s largest technology companies spurred a stock-market rebound in a volatile session that had Wall Street traders digesting faster-than-anticipated inflation data.

It was the first time since October 2022 that the S&P 500 and Nasdaq 100 each erased an intraday loss of at least 1.5%. Chipmakers led gains on Wednesday, with Nvidia Corp. up 6.5%. Financial, energy and industrial shares underperformed. Treasury yields edged up on bets the Federal Reserve will move gradually with rate cuts. Swap traders have fully priced in a quarter-point Fed reduction next week.

Sounds like the experts don’t know where this is going after next week, and they’re just throwing money around from place to place. But the overall trend is the CPI increasing at a lower level than we saw in the first 3 months of the year.

With underlying inflation of 2-2.5%, and gas prices falling in September, there’s no reason the Fed shouldn’t cut by 50 points with the Fed Funds rate being 3% higher than that. But as I have stated earlier, I suspect the Fed will be scared off by how Republicans will whine, and only do 25 points before the November elections.

The thing is, I would argue that a 50-point cut would help calm down the inflation in shelter that is the main negative of this August report, because it could encourage some people with low-interest mortgages to put their homes on the market and increase inventories.