The volatility in the markets, already heightened by Donald Trump’s confirmed return to the White House and shifting expectations about the Federal Reserve’s policy path, could see an added boost from today’s consumer price report. Forecasters anticipate that the monthly U.S. consumer price report will indicate solid core inflation for the third consecutive month, potentially fueling discussions on the pace of Fed rate cuts. 

Median estimates from a Bloomberg survey suggest that so-called core inflation, which excludes volatile food and energy prices, is expected to rise by 0.3% in October from the previous month, holding the annual core inflation rate at 3.3%. Additionally, headline inflation is projected to increase by 0.2% month-over-month, pushing the annual rate from 2.4% to 2.6%. 

Given recent data suggesting some pauses in inflation’s path toward the target, there are questions over whether Fed officials, who have implemented a cumulative 75 basis points cut this year, will be inclined to ease rates further at the December meeting. Swaps traders now view the likelihood of an additional quarter-point cut in December at 62.1%, down from 77.3% last week. 

Rising projections that the Fed may reduce rates at a slower pace are lifting U.S. Treasury yields, while the dollar continues to strengthen. Benchmark 10-year yields have climbed to 4.44%, nearly the highest in five months. This yield surge is fueled by expectations that Trump’s second term could widen fiscal deficits, prompting the Treasury to increase debt issuance to cover the gap.

Additionally, potential policies from Trump’s administration could reignite inflation, narrowing the Fed's room for further rate cuts. Under these scenarios, some investment banks predict yields could reach or even surpass 5% in the coming period. 

Fed’s Focus Shifts to Inflation Amid Policy Uncertainty 

As the labor market remains strong, Fed policymakers are now more focused on inflation data. Minneapolis Fed President Neel Kashkari stated at a conference yesterday that he would closely examine upcoming inflation reports to determine if another rate cut in December is appropriate. Kashkari noted that any upside surprises in inflation “could cause Fed to pause.” 

Meanwhile, Richmond Fed President Thomas Barkin shared two potential scenarios for the economy in his comments on the same day. The first scenario involves the Fed focusing on upside inflation risks as election uncertainty diminishes and companies resume investing and hiring. In the second scenario, businesses, facing weaker pricing power and squeezed margins, could turn to layoffs, shifting the Fed’s attention toward employment risks. 

While the U.S. election results are settled, there remains significant uncertainty around policies and their economic impact. Given the current outlook, it is unlikely that the Fed will dramatically alter its policy stance based on just a few disappointing reports, especially since recent data have been influenced by temporary factors like hurricanes. Therefore, if today’s report doesn’t bring a significant upside surprise, bets on a quarter-point cut in December may increase, which could trigger a slight retreat in yields, weigh on the U.S. dollar, and provide some support for other currencies and precious metals. 

On the other hand, recent comments from policymakers have underscored the uncertainty around the neutral interest rate, with Chair Jerome Powell emphasizing that the best approach to defining the neutral rate is to be “careful and patient.” As such, while the inflation reports ahead of the December meeting may not fully justify a Fed pause, the uncertainty around how the incoming Trump administration’s policies will impact inflation and growth could prompt the Fed to act cautiously in the new year, avoiding hasty moves to lower borrowing costs. As traders price in this possibility, it is worth noting that the U.S. dollar is likely to remain strong, and any pullbacks may be limited or temporary.