Inflationary pressures eased again in December, bolstering confidence among some Federal Reserve officials that a continued slowdown in its interest rate hikes is warranted.
In the last month of 2022, inflation measured by the consumer price index showed prices increased by 6.5% compared to last year while down 0.1% from the previous month.
Philadelphia Fed President Patrick Harker said Thursday morning that he expects the “stunning” 2022 inflation numbers to be behind us, and it makes sense to slow the pace of increases rate.
“I expect us to raise rates a few more times this year, although in my opinion the days of raising them 75 basis points at a time are surely over,” Harker said in comments. remarks prepared before the CPI report to Malvern. , PA. “In my view, 25 basis point hikes will be appropriate going forward.”
In a separate appearance on Thursday, St. Louis Fed President James Bullard called the latest CPI report “encouraging” but said inflation was still elevated, suggesting it could favor another 50 bps rate hike at the next Fed policy meeting.
“I like the front-loading policy,” Bullard told the Midwest Economic Forecast Forum for the Wisconsin Bankers Association. “I think if we want to get to the low range of 5% [for the Fed funds rate] that we should go ahead and get to this level… I don’t see the point of dragging things out until 2023.”
Bullard said that while the December CPI number was encouraging, “I think we have a lot of work to do as the Fed to make sure we get lower inflation going forward.”
The Fed raised rates by 0.50% following its December policy meeting, a slowdown after four successive increases in interest rates of 0.75%. In 2022, the The Fed raised rates by a cumulative 4.25%i.e. 425 basis points.
The data of the CME Group Thursday showed a 91% chance that the Fed would raise rates by 0.25% by the end of its next policy meeting on Feb. 22. 1.
Harker said at some point this year he expects the key rate to be tight enough that the Fed will keep rates in place to let monetary policy do its job.
The consumer price index fell a tenth of a percent month-on-month in December and rose 6.5% year-on-year – a slowdown from 7 .1% in November, Data from the Bureau of Labor Statistics showed Thursday.
Excluding volatile energy and food prices to get the so-called “core” number the Fed favors, core CPI edged up 0.3% in December, after rising 0.2% in November. Year-on-year, core CPI rose 5.7%, down from the 6% seen in November.
The key measure the Fed is focusing on – non-housing services inflation – rose 0.4% month-over-month and 7.4% year-over-year in December. The Fed sees core services inflation being driven by a strong labor market and wage growth.
Persistent wage growth could keep services inflation high in 2023, although slowing wage growth is welcome for the Fed, this data does not yet suggest a broader slowdown in the labor market.
Following Thursday’s inflation data, Roberto Perli, head of global policy at Piper Sandler, said that even with a continued slowdown in price increases, the Fed may not be convinced to give up its most recent pace of inflation. interest rate increase of 0.50%.
“I’m hesitant to bet the farm on 25 basis points,” Perli said. “Basic services out of cover are still high, so I think there’s 50 basis points left on the table. But also because in the minute of the [last meeting], the FOMC said it was not happy with how the market interrupts our reaction function. So if there is a way for the FOMC to make the market believe more in its hawkish reaction function, it would be to do 50 basis points.
Perli also sees Thursday’s report keeping the Fed on track to raise its key rate above 5%, as penciled in at the December policy meeting.
“This latest report adds more weight to our view that CPI inflation will fall faster than the Fed expects this year,” wrote Paul Ashworth, economist for Capital Economics, in a note to clients. Thursday. “But the Fed won’t stop raising interest rates until it sees evidence of easing labor market conditions and wage growth. evidence is also irrefutable.”
Earlier this week, Fed Chairman Jerome Powell underscored the Fed’s commitment to bringing inflation down, defending the central bank’s aggressive rate hikes as necessary even if they are unpopular.
Powell Noted in a speech on central bank independence that “restoring price stability when inflation is high may require measures that are not popular in the short term, as we raise interest rates to slow the economy”.
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