Wall Street Today | Fed's Barkin: 'Plausible' Slowing Economy Is Slowing Inflation

'On the ground, I hear that demand is softening,' Richmond Fed president says. The U.S. economy may be softer than the data suggest, and this weakness may be helping to moderate inflation pressure, Richmond Fed President Tom Barkin said Tuesday.

"There's a story -- a plausible story -- that weakening demand is already working to bring inflation down to 2%," Barkin said in a speech to the Real Estate Roundtable in Washington DC.

While retail sales were strong in September and estimates of third-quarter GDP are being revised higher, Barkin said business contacts tell him demand "is softening."

Treasury yields climbed and stocks struggled after solid economic reports reinforced the case for the Federal Reserve to keep interest rates higher for longer.

Two-year US yields hit the highest since 2006, while those on 10-year notes jumped 13 basis points to 4.83%. Swap contracts tied to Fed rate decisions showed traders are pricing in more than 60% odds that policymakers will raise interest rates by another quarter percentage point in January after holding steady in November. A move in December is considered possible, but less likely than in January.

“Good news about the economy is once again bad news since it will keep policymakers on the fence on delivering more tightening,” said Edward Moya, senior market analyst for the Americas at Oanda. “The US economy isn’t ready to head into a recession just yet.”

Oil settled near $86 after a choppy session as traders assessed the intensified diplomatic efforts by the US to contain the crisis in Gaza.

Prices dropped 1% before paring its losses after Russia’s Central Bank reiterated expectations that OPEC+ may consider an increase in output at the beginning of 2024. Shortly afterward, Russian Deputy Prime Minister Alexander Novak said it’s still too early to discuss what market decisions OPEC+ may take at its meeting in November.

“Traders remain on high alert” while oil remains in a holding pattern, said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “Many investors are not willing to make outright bets on crude in the current environment but are actively buying upside call options if crude supply is impacted. It is a low conviction, highly volatile trading environment.”