Bar To 75bp Dec Hike High, But Terminal Rate >5% Still Likely

One fair conclusion from October's CPI report is that the Fed is very likely to downshift its hiking pace to 50bp in Dec to a 4.25-4.50% target rate. That was the path Powell pointed to last week, and FOMC speakers since then (and importantly, post-CPI) seem to be on board.

• That's now priced in. Another 75bp raise can't be ruled out, but the bar to hurdle is quite high now, potentially requiring not just a M/M rebound in the November inflation report (due on day 1 of the 2 day FOMC meeting), but also unexpectedly strong numbers in the upcoming 2 nonfarm payrolls reports, at the very least.
• While terminal rate pricing dropped to just under 4.9%, this is hardly settled: the debate will continue about how long the Fed will have to keep raising and hold rates next year, with incoming data likely to signal sustained inflationary pressures several months into 2023.
• Indeed, the October CPI report may not be quite as big a disinflationary signal as it seemed on the surface, as we explain in our CPI review, and as highlighted in our interview with Atlanta Fed economist Brent Meyer,
• A terminal rate above 5% still looks like the most likely outcome - though the path ahead will, as always, remain data dependent.