T. Rowe Price's chief U.S. economist, Blerina Uruci, believes that the October U.S. CPI reading is not yet strong enough to justify a 50 basis point rate hike at the Fed's next meeting.
However, as expectations for rising inflation build, Uruci thinks the Federal Open Market Committee will need to raise rates more times in 2027 than the market had previously anticipated.
Uruci said that while the market may begin to price in a 50 basis point hike, adding more uncertainty to the Fed's December policy path, several near-term unknowns remain, so rather than betting on the short-term direction of rates, investors would be better served by positioning for the possibility that the Fed ultimately lifts rates to a higher level.
U.S. core CPI rose 0.3% month-on-month in October, above the 0.2% expected by the market.
Over the past three months, the pace of increase in both core goods and services prices has accelerated, reflecting strengthening inflationary pressure.
At the same time, the rise in core goods prices has also picked up, reaching 2.1% on a seasonally adjusted annualized three-month basis, above the 0.9% year-on-year gain.
This acceleration in inflation spans multiple areas, reflecting two important factors.
First, higher energy and input costs are gradually feeding through into core inflation.
Second, resilient U.S. domestic demand is giving companies the ability to pass on higher costs to consumers, especially in areas such as transportation, recreational services and core goods.
After the October CPI data were released, market expectations for rate hikes in 2027 strengthened further, with the number of hikes now expected up by one compared with the day before the release, and short-term bond yields also rose notably.
Combining the October employment and inflation data, Uruci leans more toward maintaining a shorter-duration bond allocation, and expects the policy rate and inflation level in 2027 to be higher than the market had previously estimated.
Following the recent market adjustment, current rate expectations are now closer to the baseline scenario, namely at least three Fed rate hikes in 2027.
However, short-term bond prices still face the risk of further declines, and yields may continue to rise.
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