Markets stumble after new inflation data reduces chance of a bigger rate cut

New York (CNN) — Wednesday’s Consumer Price Index report was the last bit of hope for investors clamoring for a half-point rate cut from the Federal Reserve when it meets next week.

That hope has now all but faded, and stocks are getting slammed as a result.

Hours after the August CPI report was released, which showed the annual pace of price increases cooled to 2.5%, the lowest level since February 2021, the Dow plunged by as much as 700 points, or 1.7%, before regaining by midday Wednesday. The S&P 500 and Nasdaq Composite were both down by around 0.3% at the end of the morning trading session.

CNN’s Fear and Greed Index , which measures seven barometers of market sentiment, moved further into “fear” territory.

On a monthly basis, prices rose 0.2%, unchanged from July.

But what appeared to garner a lot more attention was the 0.3% monthly rise of the core CPI gauge, which excludes food and energy. That exceeded economists expectations for a 0.2% rise. Fed officials pay close attention to core inflation readings because they can offer more clarity on where prices are headed longer term.

The higher-than-expected rise in core inflation will likely cause central bank officials to proceed more carefully when deciding whether to cut interest rates and by how much.

On Tuesday, traders were pricing in a 34% chance the Fed would cut rates by a half point. But after the CPI data was released Wednesday morning, traders priced in a 15% chance that would happen. Now they’re pricing in an 85% chance of a quarter-point cut this month as well as a higher likelihood of a quarter-point cut versus a half point at November’s meeting.

Investors generally prefer when interest rates are lower because it means companies can borrow money more cheaply, which often increases profitability.

Wednesday’s market moves are a stark contrast to Monday’s, when the Dow, S&P 500 and Nasdaq all closed 1.2% higher. Large market swings like these are far from unusual for the month of September, which has historically been a volatile month for stocks.

A post-debate reaction?

In addition to the inflation data, investors are likely also weighing the prospect of Vice President Kamala Harris’ chances in the presidential election after Tuesday night’s debate, where many commentators from both parties felt Harris outperformed former President Donald Trump.

Among Harris’ economic proposals is lifting the corporate tax rate to 28% from the current 21%. While that’s less than the 35% rate that Harris proposed during her 2020 presidential campaign, it would still raise costs for business and dig into profit margins. As a result, that could cause companies to put off new investments and curtail hiring plans.

This story is developing and will be updated.

The-CNN-Wire

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