The Federal Reserve's newest look at where inflation is heading landed this week, and it did not bring the reassurance markets had hoped for. Early readings of the central bank's November inflation outlook pointed to price pressures running hotter than many investors had penciled in, and stocks and bonds both reacted.
The Fed operates under what is often called a dual mandate: keep prices stable and keep employment strong. For most of the past two years, the inflation side of that equation has been the harder one to manage, after a post pandemic surge in prices pushed the Fed to raise interest rates to their highest level in decades. More recently, as inflation cooled from its peak, the central bank began cutting rates step by step, trying to support hiring without reigniting price increases.
A forecast showing inflation running hotter complicates that balancing act. If the Fed believes prices are not cooling as fast as hoped, it has less room to keep cutting rates, even if the job market could use the support. That tension, between fighting inflation and supporting growth, is exactly what unsettled investors this week.
Markets do not like uncertainty about the path of interest rates, because borrowing costs ripple through nearly every corner of the economy, from how much companies pay to expand, to what a family pays on a car loan. The combination of a more hawkish seeming inflation outlook and the jump in Treasury yields this week reflects that same underlying worry playing out in two related markets at once.
The Fed's next scheduled policy meeting will be watched closely for any signal about whether officials still see room to cut rates before year end.
Why does an inflation forecast move markets before it is even confirmed?
Investors try to price in expectations ahead of time, so even preliminary signals about inflation or Fed policy can move stock and bond prices immediately.
What is the Fed's dual mandate?
The Federal Reserve is tasked with both keeping prices stable and supporting maximum employment, goals that can sometimes pull policy in different directions.