By James Knightley
A 50 basis point hike at the December 14 Federal Open Market Committee (FOMC) meeting is a strong demand from both financial markets and economists. After delivering 375 basis points of rate hikes since March, including consecutive moves of 75 basis points in the previous four meetings, Federal Reserve officials believe they have made “substantial progress” in tightening policy, so it’s time to… Time to “step back” to lower steps. .
Still, Fed Chair Jerome Powell and the team have pointed out that despite smaller moves, the “final rate level needs to be slightly higher than anticipated at the time of the September meeting.”
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In that regard, the Fed will be concerned about the recent sharp fall in Treasury yields and the dollar, coupled with a tightening in credit spreads that are easing financial conditions – the polar opposite of what the Fed wants to see while it fights to keep it that way inflation lower.
These moves were themselves prompted by a weak October core CPI reading, which came in at 0.3%m/m versus a consensus expectation of 0.5%, while the Fed’s preferred measure of inflation — the central personal spending deflator — is even weaker failed. increased by only 0.2%.
The stock market reaction seems overdone to us as this is only one month of data, annual core inflation is still three times target and to reach 2% yoy, monthly readings need to average 0.17%. over time – and we’re not there yet.
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The Federal Reserve needs to see core inflation readings of 0.1% or 0.2% for several months to be confident that inflation is on track, and that should be an important part of its message.
With this in mind, we believe the Fed is not yet done with its rate hikes and indeed their new forecasts indicate a higher path for the Fed’s benchmark rate to 5% with possible slight upward revisions to near-term GDP and persistently high inflation forecasts will be used to back this up justify. Certainly the consumer sector has held up better than many – including ourselves – expected as strong jobs and income gains support spending.
Looking further ahead, several officials such as James Bullard and John Williams have suggested that the Fed may not be able to cut interest rates until 2024, and we suspect Powell and the forecasts will reflect that view. However, we strongly suspect that this is more related to the Fed’s attempt to raise longer-dated Treasury yields than to a belief that a recession and lower inflation will be avoided in the medium term.
(Author is Chief International Economist, ING)
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