Fed policymakers signal that a slower rate hike is coming, but no easing

(Reuters) – Federal Reserve policymakers on Thursday expressed relief that inflation had continued to ease in December, paving the way for a potential cut to a quarter-point increase in interest rates when the US central bank meets in less than three weeks.

U.S. consumer prices fell in December, government data showed on Thursday, the first month-to-month decline in more than two and a half years, and core inflation slowed. In the 12 months through December, the so-called core CPI rose 5.7%, the smallest gain since December 2021 and fresh evidence that the Fed’s aggressive rate hikes are having the desired effect.

“We’re actually constraining the economy, presumably in the process of constraining inflation. And that means to me I can be a little more precise,” Richmond Fed President Tom Barkin said in remarks to reporters, in deciding the size of the next rate hikes. Richmond. After raising interest rates by half a point at its December meeting, Barkin said he “conceptually supports a slower but longer and possibly higher path” depending on how inflation behaves.

“Increases of 25 basis points would be appropriate going forward,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said in a speech to a local group in Malvern, Pennsylvania, adding that once interest rates rise just above 5%, “I would expect it to be …restrictive enough to keep prices in place to allow monetary policy to do its work.”

Atlanta Federal Reserve Chairman Raphael Bostick said in an interview with CBS News that inflation data for December was “good news.” “It really suggests that inflation is moderate and that gives me some comfort because we may be able to move a little slower.”

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The Fed set its target policy rate between 4.25% and 4.5% at its December meeting. Data has since shown inflation eased and the labor market slowed modestly from the sluggish pace of job and wage growth through most of 2022.

The data kept the Fed’s hope for a “soft landing” in mind, and led policymakers this week to talk more openly about raising interest rates to the quarter-point increases the Fed has used more commonly in recent decades.

Unlike the first half of 2022, when those most worried about inflation called for bigger price increases, no one has publicly pressured colleagues for a half-point increase — even as some remain open to the idea.

“It’s encouraging that today we got some information that went in the right direction,” said James Bullard, President of the Federal Reserve Bank of St. Louis, at an event organized by the Wisconsin Bankers Association.

Bullard noted that inflation remains well above the Fed’s 2% target, and reiterated that he would like the central bank’s policy rate to exceed 5% “as soon as possible.”

But after a year in which he was an outspoken advocate for bigger raises, Pollard hasn’t backed down on small raises going forward.

However, Fed policymakers remain in agreement about further hikes – whatever the size – and the final destination is somewhere above 5%.

“We still have work to do. Inflation is very high, and we’ll need to continue the case until it returns sustainably to our 2% target,” Parkin said in comments to the Virginia Association of Bankers.

Barkin noted that the economy continues to add jobs even as growth slows. If anything, he said, recent data on economic activity has delayed the risk of a recession.

increase longer?

US stocks rose after the release of CPI data. Fed policy rate-linked futures traders bet heavily on shifting to quarter-percentage-point increases from the Jan. 31-Feb. 1 meeting and pauses just under 5%, with rate cuts priced in later in the year.

That view remains at odds with what Fed officials insist they are headed for: not just a little higher, but with a bias to stay there for a potentially long period of time, it would take for inflation to decelerate reliably toward the Fed’s target.

Minutes of the Federal Reserve’s Dec. 13-14 meeting show that no central bank policymaker expects any interest rate cuts for the full year of 2023. Atlanta Fed President Raphael Bostick said this week that his bottom line is that rates will remain high through 2024.

While inflation over the past three months has moved in the “right direction,” Parkin said on Thursday that “you have to be careful about declaring victory too soon… Inflation will be much more stable than just a small drop to 2%.” May require prices to be held at a restricted level longer than expected.

Fed policymakers have repeatedly said they want to avoid repeating the mistakes of the 1970s, when the central bank raised and then lowered interest rates when inflation appeared to be abating, only to have to raise borrowing costs even higher to put price pressures back on track.

The Fed eventually pushed borrowing costs and the US unemployment rate into double-digit territory during that period before stopping the price spiral.

Fed policymakers say they don’t expect the unemployment rate, currently 3.5%, to rise by more than a percentage point in the current fight against inflation.

(Reporting by Ann Saffer, Lindsey Dunsmeier and Michael Derby) Editing by Paul Simao and Josie Kao

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