US Stocks Climb as Cooling Inflation Bolsters Fed Rate Cut Hopes
December's 2.7% headline CPI reading, softer than economists' forecasts, has intensified investor bets on a more dovish monetary policy from the Federal Reserve in the coming year.
U.S. equities and bonds rallied on Tuesday after fresh government data showed a key measure of inflation cooled more than expected in December, bolstering investor optimism that the Federal Reserve will move to cut interest rates in the first half of the new year.
The Bureau of Labor Statistics reported that the headline Consumer Price Index (CPI) rose 2.7% from a year earlier, a notable deceleration and a positive sign for policymakers. According to The Wall Street Journal's coverage, this indicates a steady, albeit slow, path toward the central bank's long-term 2% inflation target.
More critically for the Federal Reserve, the core CPI, which strips out volatile food and energy prices, also rose by less than forecast. This figure is closely watched by the central bank as a more reliable indicator of underlying price pressures. The softer reading, detailed by Bloomberg, provided markets with a clear signal that the historic rate-hiking cycle is effectively taming inflation.
Investors reacted swiftly to the news, pushing stock market futures higher in pre-market trading, a trend that continued into the opening bell. The S&P 500 and the tech-heavy Nasdaq Composite both saw gains as the data suggested a lower cost of capital for businesses and a healthier outlook for corporate earnings.
The bond market also signaled its approval. Yields on U.S. Treasury notes, which move inversely to prices, fell across the curve. The yield on the benchmark 10-year Treasury note dropped as bond investors increased their bets that the Fed would pivot to a more dovish stance sooner than previously anticipated.
"This report is a clear confirmation that the disinflationary trend is intact," one analyst noted. "While the Fed won't declare victory based on one month's data, it provides them significant breathing room and strongly shifts the bias toward rate cuts, not hikes, as their next move."
The data comes just weeks before the Federal Open Market Committee's next monetary policy meeting. While no change in the federal funds rate is expected at the January meeting, the CPI report will feature heavily in the committee's discussions and forward guidance. Market pricing, as seen in the federal funds futures market, now indicates a higher probability of a rate cut occurring as early as the March meeting.
For much of the past year, investors have grappled with the Fed's "higher-for-longer" interest rate mantra, which has weighed on asset valuations. Tuesday's inflation data offers the most concrete evidence yet that the economic narrative may be shifting, paving the way for a less restrictive monetary policy that could further support both equity and fixed-income markets in the months ahead. The market's focus now turns to upcoming producer price index (PPI) data and labor market reports to see if the cooling trend is confirmed across the economy.