Treasury Sec Yellen: On Second Thought, Inflation May Persist

Treasury Secretary Janet Yellen said she is not reading too much into October’s inflation report, which showed price pressures abating faster than expected and sent markets soaring.

While the consumer price index report, which showed annual inflation slowed to 7.7%, was good news, it might not mean that inflation is now in fast retreat, she said Friday.

“I don’t know if this is a turning point,” Yellen told Reuters during an interview from India, where she was meeting with India’s Finance Minister Nirmala Sitharaman. “I never make more of one data point. That is one data point.”

“It was certainly nice to see an inflation report that came in on the low side of expectations rather than the high side and, you know, we’ve seen early indications along the pipeline that inflation might be diminishing,” she added.

STOCKS SEE BIGGEST RALLY SINCE 2020 AS INVESTORS TAKE HOPE FROM INFLATION REPORT

The Thursday report also revealed that “core inflation,” which strips out volatile food and energy prices, eased by three-tenths of a percentage point to 6.3%.

In separate remarks to reporters on Friday, Yellen stressed that shelter costs, including rents, make up a third of the consumer price index and will continue to cause strain on consumers’ pocketbooks heading into next year. Still, she said that the fact that core inflation declined is a good sign for the economy.

“Core inflation was a lot lower than had been anticipated, and that’s in spite of the fact that we continue to get high readings on shelter,” the treasury secretary said.

The news of the better-than-expected inflation report excited investors and gave them hope that the Federal Reserve would become less aggressive in its cycle of hiking interest rates. The stock market responded by posting its biggest gains in two years amid the rosy sentiment.

At close, the Dow Jones Industrial Average had exploded upward by more than 1,200 points, or 3.7%. The tech-heavy Nasdaq composite surged by more than 6.1%, and the S&P 500 grew by some 5.5% the day that the inflation report dropped — its biggest one-day gain since April 2020.

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The Fed has raised rates by a mammoth 75 basis points at its last four meetings, a historic scale that is akin to 12 conventional rate hikes. Because inflation came in a bit cooler than predicted, it now appears likely that the Fed will only raise rates by 50 basis points at its December meeting.

Investors are now pegging the odds of another three-quarters hike at just over 19% and pricing in about an 81% chance of a 50 basis point hike, according to CME Group’s FedWatch tool, which calculates the probability using bond market futures prices. Just a day ago, the odds of a 75 basis point increase were as much as 43%.