Inflationary pressures eased again in December, giving some Federal Reserve officials more confidence that a sustained slowdown in interest rate hikes is in order.
In the last month of 2022, inflation as measured by the Consumer Price Index showed that prices increased by 6.5% compared to last year, and decreased by 0.1% compared to the previous month.
Philadelphia Fed President Patrick Harker said Thursday morning that he expects 2022’s “eye-popping” inflation figures are behind him and that it makes sense to slow the pace of rate hikes.
“I expect we’re going to raise rates a few more times this year, but in my view the days of raising them to 75 basis points at a time are definitely over,” Harker said in a statement ahead of the CPI report in Malvern. , PA. “In my view, a 25 basis point hike would be appropriate going forward.”
In a separate speech on Thursday, St. Louis Fed President James Bullard called the latest CPI report “encouraging” but suggested inflation remains high, suggesting the Fed may favor another 50 basis point rate hike at its next policy meeting.
“I like the front-load policy,” Bullard said at the Midwest Economic Forecast Forum for the Wisconsin Bankers Association. “I think if we want to get to the bottom 5% range [for the Fed funds rate] we have to go ahead and get to that level… I don’t see the point in dragging everything out until 2023.”
Bullard said that while December’s CPI numbers were encouraging, “I think we have a lot of work to do as the Fed to make sure that inflation is going to come down.”
The Fed raised rates by 0.50% after its December policy meeting, a slowdown after four consecutive 0.75% rate hikes. In 2022, the Fed increased the discount rate by a total of 4.25% or 425 basis points.
Data from the CME Group on Thursday showed a 91% chance the Fed will raise rates by 0.25% at the conclusion of its next policy meeting on February 1.
At some point this year, Harker said, he expects the policy rate to be restrictive enough to keep rates on hold to allow the Fed’s monetary policy to do its job.
The consumer price index fell one-tenth of the month in December and rose 6.5% year-over-year, a slowdown from 7.1% in November, the Bureau of Labor Statistics reported Thursday.
Stripping out volatile energy and food prices to get the Fed’s preferred “core” number, core CPI rose 0.3% in December after rising 0.2% in November. Year-on-year, core CPI rose to 5.7% from 6% in November.
The main metric the Fed focuses on – services inflation excluding housing – rose 0.4% month-on-month in December and 7.4% year-on-year. The Fed sees core services inflation being driven by a strong job market and wage growth.
Sustained wage growth could keep services inflation warm in 2023, and while a slowdown in wage growth in December was welcome for the Fed, the data does not yet suggest a broader slowdown in the labor market.
After Thursday’s inflation data, Roberto Perli, global head of policy at Piper Sandler, said the Fed may not be convinced to pull back from a 0.50% rate hike even if there is a sustained slowdown in inflation.
“I’m hesitant to bet the farm 25 basis points,” Perley said. “The shelter is still high past essential services, so I think 50 basis points remains on the table. But also because [last meeting], the FOMC said they were not happy with how the market cut our reaction function. So if there’s a way the FOMC can think of to make the market more convinced of its hawkish reaction function, it would be to do 50 basis points.”
Perley also sees the Fed on Thursday keeping its policy rate on track to rise above 5%, as outlined at its December policy meeting.
“This latest report adds more weight to our view that CPI inflation will fall faster this year than the Fed expects,” Paul Ashworth, an economist at Capital Economics, said in a note to clients on Thursday. “But the Fed will not stop raising interest rates until it sees evidence of softening labor market conditions and rising wages. It will take several months for that evidence to become incontrovertible.”
Earlier this week, Fed Chairman Jerome Powell defended the central bank’s aggressive interest rate hikes as necessary, even if unpopular, emphasizing the Fed’s commitment to reducing inflation.
Powell noted in his speech on central bank independence that “restoring price stability when inflation is high may require unpopular measures in the short term as we raise interest rates to slow the economy.”
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