U.S. stocks have hit new all-time highs as Hurricane Milton, which caused major damage, starts to lose strength while moving over Florida. Now that the storm is calming, everyone’s attention is shifting back to the U.S. economy, especially with a big inflation report set to come out on Thursday.
Despite worries about the weather and ongoing conflicts in the Middle East, the U.S. economy is staying strong. People are also adjusting their expectations about what the Federal Reserve (Fed) will do with interest rates. As a result, the U.S. dollar is climbing and is now near its strongest point in two months.
What’s Next for Interest Rates?
Even with the challenges, the U.S. economy is still growing at more than 3%. Right now, experts believe there’s only about an 80% chance the Fed will lower interest rates again next month. In fact, the entire rate prediction has shifted by 50 basis points over the last month. That means the final Fed interest rate could end up around 3.5%, much higher than the 2.9% many had expected.
On Wednesday, the Fed released meeting minutes that showed a majority of officials supported a half-point rate cut. However, they also agreed that this wouldn’t lock them into a specific pace for future cuts. A lot of Fed officials who spoke this week echoed this view.
Mary Daly, the head of the San Francisco Fed, said it best: “Two more cuts this year, or one more cut, is what I think is most likely.”
Rising Yields and Inflation Worries
After a so-so auction of 10-year Treasury notes on Wednesday, the yields on these notes jumped to their highest levels since July. Both the two-year and 10-year yields are now back above 4%. This could be a bit concerning for the Fed, as inflation expectations are creeping higher.
The inflation forecast from the 10-year inflation-protected securities markets hit a three-month high, rising to 2.3%. That’s 30 basis points higher than just a month ago. And, adding to the concern, the U.S. Treasury’s 10-year term premium—which measures how much extra investors demand to hold long-term government debt—went back into positive territory this week.
All Eyes on CPI Report
All this brings us to today’s critical report on consumer prices. Analysts expect headline annual CPI inflation to drop to 2.3%—its lowest in over three years. However, core inflation, which doesn’t include food and energy, might stay sticky around 3.2%.
“I still see a real risk that inflation could stay above our 2% goal,” said Dallas Fed chief Lorie Logan. She warned that the Fed shouldn’t rush to bring interest rates back to a so-called ‘neutral’ level just yet.
Oil Prices Stay Calm Amid Global Tensions
Even though global energy markets are anxious about possible retaliation from Israel against Iran for recent rocket attacks, oil prices have stayed steady. U.S. crude is holding just above $74 per barrel.
This mix of events—stock surges, rising yields, and inflation worries—makes the next few days critical for the market. With so much happening, it’s no wonder everyone’s paying close attention to the Fed and today’s CPI report. Keep watching, because this could set the tone for what’s next!