In a highly anticipated report, the Consumer Price Index (CPI) revealed inflation cooled to 2.5% in August, the lowest rate since February 2021. However, a slight uptick in core inflation—a key measure that excludes food and energy prices—raised concerns on Wall Street. 0.3% monthly increase in core inflation exceeded economists’ forecasts and prompted traders to reconsider expectations for a more aggressive interest rate cut by the Federal Reserve.
Major indices experienced significant volatility following the report. Dow Jones Industrial Average plummeted by as much as 700 points, or 1.7%, shortly after CPI data was released. S&P 500 and Nasdaq Composite also dropped sharply. However, all three indices staged a dramatic recovery, with the Dow finishing day up by 124 points, the S&P 500 gaining 1%, and the Nasdaq Composite surging 2.2%.
Rate Cut Hopes Diminish
Before the CPI report, many investors had hoped for a more substantial half-point rate cut from the Federal Reserve at its upcoming meeting. However, a higher-than-expected rise in core inflation has caused that optimism to fade. As of Wednesday afternoon, traders were pricing an 85% chance of a more modest quarter-point rate cut this month. The likelihood of a half-point cut at November’s meeting also decreased.
Federal Reserve closely monitors core inflation when deciding monetary policy because it offers a clearer view of long-term inflation trends. With this rise in core inflation, central bank officials may choose to proceed more cautiously.
Historical September Volatility
September is traditionally a volatile month for stocks, and swings in market sentiment are not uncommon during this period. According to the CNN Fear and Greed Index, market sentiment moved further into “fear” territory on Wednesday morning before stabilizing.
Political Factors at Play
In addition to economic data, political developments may influence investor sentiment. Vice President Kamala Harris’ strong performance in Tuesday night’s debate against former President Donald Trump has increased focus on her economic platform. Harris has proposed raising the corporate tax rate from 21% to 28%, which could impact corporate profits and slow hiring and investment plans.
As traders weigh both economic indicators and political factors, markets are likely to experience continued volatility in the lead-up to the Federal Reserve’s decision.
As traders weigh both economic indicators and political factors, markets are likely to experience continued volatility in the lead-up to the Federal Reserve’s decision.