There was a surprisingly large amount of tension within markets and the Federal Reserve about what Wednesday's Consumer Price Index report might show.
The tension was still alive on Thursday as investors await a Dallas speech by Fed Chairman Jerome Powell at 3 p.m. ET.
Stock indexes were off slightly Thursday and have been flat or lower all week. The Standard & Poor's 500 Index was off 10 points to 5,976.
The latest Producer Price Index report was stronger than expected, rising 2.4% year-over-year.
The news briefly pushed the yield on the 10-year Treasury yield to 4.486%, the highest level since Nov. 6, before dropping back to 4.41%.
By noon, the yield was back to 4.41%. The iShares 20+ Year Treasury Bond ETF (TLT) , which tracks longer-term Treasury yields, was off about 1% to $89.80.
And you can expect more tension every time an inflation report comes up, whether it's this year or 2025.
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The CPI report showed overall inflation rising 2.6% year over year. Core CPI, which excludes food and energy prices — figures that tend to be volatile — was up 3%.
The PPI report mirrored the CPI. Its core change was 3.1%.
Related: Stock Market Today: Stocks end mixed on in-line CPI inflation report
The rate on a 30-year mortgage was quoted at just about 7% on Thursday, according to Mortgage News Daily, down slightly from Tuesday but up from 6.11% on Sept. 17.
That was the day before the Fed started to cut rates. Its key Federal Funds Rate has been cut to 4.5% to 4.75% from 5.25% to 5.5%.
High interest rates are choking housing market
Housing is a weak link in the economy. Rents are high. Construction is down. Home sales have been flat. At 6.1%, the monthly principal and interest payment on a $250,000 mortgage should come in at $1,517. At 7%, the payment rises to $1,663, an increase of 9.7%.
The Federal Reserve is thrilled that inflation is mostly below 3% and wants to cut short-term interest rates further than it has so far. What the Fed does not want is a surprise.
Fed officials weigh in on whether inflation is still too high
Fed officials made their position clear about the CPI report in comments during the day.
Neel Kashkari, president of the Minneapolis Federal Reserve Bank, had told Bloomberg News on Tuesday that a hot CPI report would make him reconsider another rate cut.
The CPI report on Wednesday was good enough that Kashkari said, "I have confidence that inflation is headed in the right direction."
Kashkari has said, however, that it could take one to two years for inflation to reach the Fed's 2% inflation target.
He thinks we can get another rate cut in December, but that will depend on additional inflation and jobs data. Over the weekend, Kashkari told Fox News that there's a chance markets won't get as many cuts as they hope.
"One of the pleasant surprises that we've had is that productivity seems to be higher in the U.S. economy over the last few years. If that is sustained, and we're in a structurally more productive economy going forward, then that tells me we probably wouldn't end up cutting (rates) quite as far," said Kashkari.
Alberto Musalem, president of the Federal Reserve Bank of St. Louis, was more cautious. He's worried the interest-rate decline that's come in 2024 will remain stalled.
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Data he's seen suggests the economy was “stronger, perhaps materially stronger, than it had been” and that several measures of inflation had come in “a little higher.”
But the tension was rising again as Wednesday turned into Thursday. That's because the Labor Department's Producer Price Index report was scheduled to come out before U.S. markets opened in the morning.
Stocks will react to what happens to interest rates
Futures trading suggested a flat open for the stocks, which have enjoyed a huge rally since the Nov. 5 election. The Standard & Poor's 500 Index is up 4.8% since Nov. 4.
Trading in Treasury futures suggests there's still worry that interest rates may be pushed higher.
The rate pressure is partly due to worries about global tensions, particularly in the Middle East.
And there's also concern that President-elect Donald Trump's economic agenda assumes more tax cuts and increased tariffs. That would require the administration to seek to borrow billions of dollars more to finance the government's operations.
The next big inflation report comes Nov. 27, the day before Thanksgiving: the Personal Consumption Expenditures Price Index.
The index, the Fed's preferred inflation gauge, measures what people actually pay for goods and services.
The most recent report on September spending showed prices had risen 2.1% with core inflation (excluding food and energy) up 2.7%.
Related: Veteran fund manager sees world of pain coming for stocks
