Market participants pause as they await tomorrow’s inflation report

It is recognized that the probability of lower inflation in the December report. The assumption that inflation continues to decrease has been mostly factored into market prices. The CPI will be released tomorrow after Chairman Powell’s strong and hawkish speech yesterday at a conference of the Central Bank of Sweden.

Powell’s speech did not include new insights or flexibility not already addressed. You have helped foster an unwavering commitment that has only strengthened over the past few months. One of the subtle topics he avoided until yesterday was that the Fed must make unpopular decisions to stabilize prices. While the words were, for the most part, different, the message was still the same, “The Federal Reserve is committed to maintaining interest rates at a high level.” This idea is carved in stone.

One of the topics missed until yesterday was that pressure from politicians will not affect Fed policy. “The absence of direct political control over our decisions allows us to take these necessary actions without regard for short-term political factors,” President Powell said during his speech.

No change has been made by the Fed deviating from its current target of raising the benchmark interest rate to just over 5% and maintaining a high level throughout the full year.

This means that no matter how much progress there is between November and December and how much inflation has diminished, it seems unlikely that it will influence the Fed to abandon its aggressive monetary policy and raise interest rates. The Fed is so focused on not allowing inflation to become so entrenched in the economy that it seems to not see the forest from the trees.

Inflation is still very persistent with some sectors that cannot be affected by the Fed’s actions. Two of the major sectors of concern are food and energy, and their costs are still constantly higher. The Fed does not have any effective tools or means to implement a strategy that would lead to any appreciable rate reduction in these two areas which account for a large portion of average US spending.

The Federal Reserve Bank of New York recently predicted that inflation for the month of December would show to be continuing to decline. Forecasts are that the CPI will show inflation declining by approximately 6.5% year-on-year. While many analysts believe that if the actual numbers come in below these expectations, it will influence the Federal Reserve to back down from its firm commitment to keeping interest rate levels high throughout the entire year.

If this is true, tomorrow’s report will not have much real impact on the belief that it will not have any significant impact on current policy. In other words, tomorrow’s CPI report will not have much impact on future decisions of Fed members, which begs the question, why are investors so focused on tomorrow’s numbers?

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