Policy outlook
Today’s inflation report brings some much-needed relief for equity markets, averting immediate concerns around stagflation and giving the Fed space to potentially cut policy rates in the coming months if economic data continues to deteriorate. Certainly, with extraordinarily elevated policy uncertainty weighing on sentiment, retail companies beginning to sound warning bells around consumer spending, and recession concerns spiking, investors are hoping that the Fed put will come into play relatively soon.
However, today’s print alone is unlikely to turn market sentiment around fully. The easing in services prices, while a welcome development to disinflationary progress, is potentially a sign of weaker consumer demand. It’s also worth remembering that this may be the calm CPI report before the storm. Not only does the Fed need to wait for tariff policy clarity, but once tariff implementation arrives it is likely to bring at least some price increases, with the inflation picture potentially getting uglier as the months go on. The Fed—and markets—are not yet in the clear.