Wall Street Journal senior economic correspondent Nick Timiraos discusses whether the Fed will hike rates another 50 basis points at its next FOMC meeting, on “Cavuto: Coast to Coast”.
A high-stakes inflation report due Thursday is expected to show that price gains slowed further in December thanks to a fall in gas and energy costs but still remain at historically high levels.
Economists expect the consumer price index, which measures a basket of goods including gasoline, healthcare, groceries and rent, to show monthly price gains were flat in December, compared with a 0.1% rise in November. On an annualized basis, inflation is expected to have risen by 6.5% annually, down from 7.1% in November and peaking at 9.1% in June.
Excluding the more volatile food and energy readings, prices are expected to rise 0.3% or 5.7% annually, suggesting that underlying inflationary pressures remain strong.
“I think inflation peaked a long time ago, early to mid last year,” Luke Tilley, chief economist at Wilmington Trust, told FOX Business. “The question has always been how fast it will go down. Monetary policy is clearly working and has found shelter.”
AMERICANS’ INFLATION EXPECTATIONS DECLINE IN NOVEMBER TO THE LOWEST SINCE 2021, NY FED SURVEY SHOWS
A vendor arranges clothing for sale at a holiday market at the Eastern Market in Detroit, Michigan on Sunday, December 11, 2022. (Emily Elconin/Bloomberg via Getty Images / Getty Images)
While consumers have recently been relieved of inflation in the form of lower gas prices, the latest CPI report is likely to show that food and rental costs remain uncomfortably high. This is a worrying development because higher housing and food costs have the most direct and acute impact on household budgets.
The report is the last before the next Federal Reserve meeting on February 1 and will have major implications for the Federal Reserve, which is tightening monetary policy at its fastest pace in decades while trying to spiral inflation out of control. Officials have already approved seven outright rate hikes in 2022, raising the federal funds rate to a range of 4.25% to 4.5%, well into hawkish levels. Officials have since indicated that more hikes are on the horizon this year and that they intend to keep interest rates at elevated levels for some time.
Wall Street firms and investors are eagerly watching whether the Fed will stick with another 50 basis-point hike when policymakers meet in February, or approve a smaller 25 basis-point hike instead. Shares rallied ahead of the report Wednesday.
The CME FedWatch tool shows a 77 percent chance of a quarter point rise and a 23 percent chance of a half point rise.
“A weaker inflation report Thursday morning doesn’t really change their near-term outlook or their language,” said Tilley, who expects a peak rate of around 5%. “It basically validates where they’re coming from when they want to slow the pace of migration.”
Federal Reserve Chairman Jerome Powell speaks during a news conference following a Federal Open Market Committee (FOMC) meeting May 4, 2022 in Washington, DC. (Al Drago/Bloomberg via Getty Images/Getty Images)
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The Fed also monitors other economic indicators, including job growth and consumer inflation expectations. Another welcome sign for the central bank was some signs of a slowdown in the labor market and a rapid slowdown in wage growth in last week’s December jobs report.
“Overall, this report should serve to reassure the Fed that a continued slowdown in the pace of monetary tightening – with a 25 basis point rate hike in early February – is appropriate, although expectations of a dovish turn would still be misguided,” Gregory Daco said , EY Parthenon’s chief economist said Friday after the job report.
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FOX Business host Charles Payne on the Fed’s anti-inflation plans on ‘Making Money’.