Investors were hoping for a half-point rate cut from the Federal Reserve at their next meeting, but those hopes were dashed after the release of the Consumer Price Index report on Wednesday. The report showed that the annual pace of price increases had cooled to 2.5%, the lowest level since February 2021. As a result, the Dow plunged by as much as 700 points, the S&P 500 was down by 1.5%, and the Nasdaq Composite moved 1% lower. CNN’s Fear and Greed Index also moved further into “fear” territory, indicating a negative sentiment in the market.
On a monthly basis, prices rose 0.2%, unchanged from July. However, the 0.3% monthly rise of the core CPI gauge, which excludes food and energy, exceeded economists’ expectations for a 0.2% rise. Fed officials pay close attention to core inflation readings as they provide more insight into the longer-term direction of prices. The higher-than-expected rise in core inflation will likely prompt central bank officials to proceed more cautiously when deciding on interest rate cuts and their magnitude.
Prior to the release of the CPI data, traders were pricing in a 34% chance of a half-point rate cut by the Fed. However, after the data was released, that probability dropped to 15%. Now, traders are pricing in an 85% chance of a quarter-point cut at the upcoming meeting, with a higher likelihood of another quarter-point cut rather than a half point at the November meeting. Lower interest rates are generally preferred by investors as they make borrowing money more affordable for companies, potentially boosting profitability.
The market reactions on Wednesday were a stark contrast to Monday, when all major indices closed 1.2% higher. September is historically a volatile month for stocks, and large swings in the market are not uncommon. The situation is still evolving, and updates may follow as more information becomes available. Overall, the CPI report has impacted investor expectations regarding interest rate cuts by the Federal Reserve and has caused volatility in the stock market.
