- Consumer inflation used to be a bigger deal for markets, but the Fed has effectively said the current level of inflation does not matter for now.
- Fed Chairman Jerome Powell testifies before the Joint Economic Committee of Congress Wednesday, and his words should be what matters most to markets, as investors watch for an change in tone.
- Economists expect inflation to rise slightly and Powell to stand pat on his message that the Fed is on hold for now.
Consumer inflation is expected to have risen slightly in October over September, but Fed officials are unlikely to see higher prices as a threat for some time to come.
Fed Chairman Jerome Powell made that clear when he discussed inflation following the Fed's last meeting Oct. 30. At that meeting, the Fed cut rates but indicated it would now stay on hold and watch the economy.
Powell is speaking Wednesday at 11 a.m. to the Joint Economic Committee of Congress, not long after the 8:30 a.m. consumer price index report. Normally, inflation is a report that the markets watch closely since inflation is one part of the Fed's dual mandate.
Investors will be watching to see if Powell sticks to the same message that he delivered after the Fed's last meeting. Powell said the central bank would stay on hold and would not change course unless it saw changes in the economic outlook or a very persistent rise in inflation.
The consumer price index is expected to show inflation rose 0.2%, excluding food and fuel. Year-over-year, core CPI is expected to be up 2.4%, the same as September's pace and above the Fed's 2% inflation target. Headline CPI is expected to rise by 0.3% or 1.7% year-over-year.
Stephen Stanley, chief economist at Amherst Pierpont, said the things that led to slower inflation in September, apparel and used vehicles, may have rebounded in October, and gasoline prices should also be higher in October.
But economists do not expect the Fed to care much about the pace of inflation, which remains fairly subdued. The Fed's preferred measure of inflation, the core PCE deflator, was still running at a cool 1.7% in September.
Powell is expected to discuss the economy, the Fed's outlook and policy when he appears Wednesday. He also speaks Thursday before the House Budget Committee.
"He laid it out pretty well. They're done for now," said Chris Rupkey, chief financial economist at MUFG. "I can't think of anything he would say that would sound any more hawkish."
Powell has moved the market's focus away from inflation, and he's made it clear the Fed would not take action immediately if inflation rose above its 2% target.
"So I think we would need to see a really significant move up in inflation that's persistent before we would consider raising rates to address inflation concerns, " Powell said after the last Fed rate cut.
Bond yields have moved higher, both on improving economic data and the Fed's decision to pause on rate cuts.
"The overall trend in bonds is higher yields, though they've stalled here for now," said Rupkey. The 10-year yield was at 1.91% Tuesday, after finishing at 1.94% on Friday. The market was closed Monday.
"The one thing that could make the bond market sell off or turn around in a hurry is if there's a China U.S. trade agreement," said Rupkey. "Any sign from Powell that the geopolitical risk or the China U.S. trade talks are rising again — that would be something that would affect the market. ... The tone will be that they're done, and they're really done and they think policy is in a good place for now."