Traders are growing increasingly confident that the Federal Reserve will cut interest rates again next week. There are just a few hurdles left that could derail that belief, starting with the November consumer price index report due out on Wednesday. Economists expect a monthly increase of 0.3% for both the headline CPI reading and core CPI, which excludes volatile food and energy prices, according to Dow Jones. The November producer price index, scheduled for Thursday, is expected to show an increase of 0.2% in its headline and core readings. Economists can then weigh the various components of CPI and PPI to estimate how the Fed’s preferred inflation gauge, the personal consumption expenditures index, will shake out. That math can get wonky, but the view on Wall Street is that the Fed is highly likely to cut rates again next week if inflation comes in at or below expectations in those two reports. “Going into the November jobs report, we said inflation was more important for the Fed’s December decision,” Bank of America U.S. economist Aditya Bhave said in a note. “We suggested that the Fed would not cut in December if this week’s CPI and PPI data pointed to core PCE inflation of more than 0.30%. We stick with this view.” Others on Wall Street think the bar may be even higher for the central bank to hold rates where they are. A note from JPMorgan’s trading desk on Tuesday suggested that bond traders would continue betting on a rate cut unless the CPI reading came in above 0.40%. Currently, trading in the Fed funds futures market suggests an 86% likelihood of a rate cut next week, according to the CME FedWatch Tool. That is up from about 73% a week ago. The central bank has already lowered borrowing costs twice this year, in September by half a percentage point and in November by a quarter. The benchmark fed funds rate currently sits at 4.50% to 4.75%. If the Fed does end up cutting, it will be the third straight meeting where the central bank lowered its benchmark rate, despite the fact inflation has not fallen all the way back to its 2% target. Concerns about the labor market and political perception could be two key reasons for the Fed to keep cutting. “We also think cutting is the path of least resistance from a political perspective,” BofA’s Bhave said. “Several FOMC participants have said that they think there is considerable room for additional cuts. Given this, not cutting in December could be viewed as preempting the incoming administration’s fiscal or trade policy. That is something Powell has explicitly said the Fed will not do.” — CNBC’s Michael Bloom contributed reporting.
