Why the Fed may prioritize the labor market over sticky inflation

The markets (^DJI, ^IXIC, ^GSPC) have pretty much priced in an interest rate cut ahead of the Federal Reserve's October FOMC meeting this week.

Morgan Stanley senior fixed income portfolio manager Vishal Khanduja comments on the inflation trends that could emerge for Fed officials over the next three to six months coming off September's long-delayed CPI (Consumer Price Index) report.

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Video Transcript

00:00 Speaker A

So they they cut Vishal even as inflation is is above their target. Does that mean investors should think about, hey, well, I guess 3% is the new 2%?

00:13 Vishal

I think for a brief time period, yes, probably for the next three to six months. I think you would see inflation hovering around that higher uh end of their comfort zone. I think the last CPI report, which was a clean data, again backward looking but very clean data that we got, uh clearly showed you glimpses of that. If the consumer, the top uh echelon of the US consumer is able to take on the price increases from tariffs, which I think some of those categories in the CPI number showed that they were, companies are going to be very comfortable passing that down. So you would see that in the next three to six months, some of those then consumers pushing back and then the profit margins getting impacted. So we do think that the Fed is very clearly going to be very focused on the labor market downsides rather than the temporary still higher and uncomfortable but temporary and sticky inflation uh prints that we're going to see for the next three to six months.

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