Inflationary pressures eased again in December, giving some Federal Reserve officials more confidence that a sustained slowdown in rate hikes is warranted.
In the last month of 2022, inflation as measured by the consumer price index showed that prices rose by 6.5% yoy, while they fell by 0.1% yoy.
Philadelphia Fed President Patrick Harker said Thursday morning he expects the “flashy” inflation reading of 2022 to be behind us and that it makes sense to slow the pace of rate hikes.
“I expect we’ll hike rates a few more times this year, but I think the days of raising rates by 75 basis points are certainly over,” Harker said in a note that was prepared prior to the CPI report in Malvern, PA. “In my view, increases of 25 basis points are appropriate going forward.”
Philadelphia Federal Reserve President Patrick Harker in New York City on September 27, 2019. (Photo by John Lamparski/Getty Images)
In a separate appearance on Thursday, St. Louis Fed President James Bullard called the latest CPI report “encouraging” but said inflation was still high, suggesting he could expect another 50 basis point hike in interest rates might endorse at the next Fed monetary policy meeting.
“I like the frontloading policy,” Bullard said at the Midwest Economic Forecast Forum for the Wisconsin Bankers Association. “I think if we want to get to the low 5 percent range [for the Fed funds rate] that we should go ahead and move to that level… I see no point in delaying things until 2023.”
Bullard said that while December’s CPI read was encouraging, “I think we still have a lot of work to do as the Fed to make sure we’re going to bring inflation down going forward.”
James Bullard, President of the Federal Reserve Bank of St. Louis, chats during a break at a monetary policy conference at Stanford University’s Hoover Institution in Palo Alto, California, the United States, May 6, 2022. Picture taken May 6, 2022. Portal/Ann Sapphire
The Fed hiked rates by 0.50% after its December monetary policy meeting, a slowdown after four straight hikes of 0.75%. In 2022, the Fed hiked rates by a total of 4.25%, or 425 basis points.
Data from CME Group on Thursday showed a 91% chance the Fed will hike rates by 0.25% at the close of its next monetary policy meeting on February 1st.
The story goes on
Harker said sometime this year he expects interest rates to be tight enough that the Fed will hold rates 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, Bureau of Labor Statistics data showed on Thursday.
Extracting volatile energy and food prices to get the Fed’s preferred so-called “core” number, core CPI rose 0.3% in December after rising 0.2% in November. Year-on-year, core CPI rose 5.7%, up from 6% in November.
The key metric the Fed is focused on — non-home services inflation — rose 0.4% mom and 7.4% yoy in December. The Fed expects core services inflation to be driven by strong labor market and wage growth.
Sustained wage growth could keep services inflation humming in 2023, and while the Fed welcomed the deceleration in wage growth in December, this data does not yet point to a broader labor market slowdown.
Following Thursday’s inflation data, Piper Sandler’s head of global policy Roberto Perli said that even if inflation continued to slow, the Fed may not be convinced to back down from its recent pace of 0.50% hikes.
“I’m hesitant to put the farm at 25 basis points,” Perli said. “Core Services ex Shelter is still high, which leaves 50 basis points on the table in my opinion. But also because in the minutes from [last meeting], the FOMC said they are not happy with the way the market is interrupting our reaction function. So if there is a way for the FOMC to make the market believe more in its restrictive reaction function, it would be to do 50 basis points.”
Perli also sees Thursday’s report keeping the Fed on track to raise interest rates above 5%, as hinted at at December’s monetary policy meeting.
“This latest report adds weight to our view that CPI inflation will fall faster this year than the Fed expects,” Paul Ashworth, an economist at Capital Economics, wrote in a note to clients on Thursday. “But the Fed won’t stop raising interest rates until it sees accompanying evidence of easing labor market conditions and wage growth. It will be a few more months before this evidence is irrefutable.”
Earlier this week, Fed Chair Jerome Powell underscored the Fed’s commitment to bringing down inflation and defended the central bank’s aggressive rate hikes as needed, even if 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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