Her campaign — which came too late, some critics argue — appears to be paying off as a raft of data from across the economy suggests inflation is finally slowing, a year after Chair Jerome Powell and his colleagues incorrectly predicted that she would soon wear off. Still, a persistently tight labor market, with unemployment at a five-decade low, means policymakers are unwilling to declare victory.
The mixed signals complicate discussions about when to pause after an expected quarter-point rate hike on Feb. 1, a more moderate pace than the aggressive rate hike that has been ongoing since mid-2022.
Investors and economists continue to question Fed forecasts that interest rates will rise to over 5% from their current level of just under 4.5%.
“Even with the recent moderation, inflation remains elevated and policies will need to be sufficiently restrictive for some time to ensure inflation returns to 2% on a sustained basis,” Fed Vice Chair Lael Brainard said in Chicago on Thursday. She didn’t make her preference for interest rates clear at the next meeting or in the coming months, but other officials were more explicit.
Both Lorie Logan and Patrick Harker, Governors of the Dallas and Philadelphia Fed banks and voters this year on monetary policy, supported a slowdown in rate hikes while backing further tightening.
“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 told the New on Friday Jersey Bankers Annual Leadership Forum. “In my view, increases of 25 basis points are reasonable going forward.”
Another senior official, New York Fed President John Williams, said Thursday that “monetary policy has more work to do” to bring inflation back to 2%.
Officials rose half a point last month to a target 4.25%-4.5% range, slowing the pace of rate hikes by 75 basis points after four consecutive moves. According to their median forecast, which will next be updated in March, they also forecast interest rates to rise to 5.1% in 2023.
Investors expect rates to rise a quarter point at the next session but will peak in a slightly lower 4.9% zone. This view has been bolstered by a recent set of benign inflation data suggesting the Fed is winning the battle on prices and easing financial conditions as markets recover.
“What if financial conditions ease as the supply side recovers?” said Julia Coronado, President of Macropolicy Perspectives LLC. “I would expect some Fed officials to move closer to the market by the ‘March forecast round’.”
Officials begin to split. Some officials see pandemic imbalances improving and want the data to dictate how much more action is needed. Others have a more hawkish outlook, fearing that inflation will persist and a sustained period of tightening will be required to hedge against a rebound in prices.
Right now, no one is ready to call for a pause in the tightening cycle.
The latest US economic data is mostly consistent with the gradual slowdown in activity that officials had been hoping for. But they insist their work is not done, with some saying complete job cuts are needed to bring inflation back to its 2% target.
Some remain committed to raising rates above 5% as a form of risk management, regardless of what near-term data says.
“You would probably have to get above 5% to say with a straight face that we have the right level of interest rates that will continue to push inflation lower in 2023,” St. Louis Fed President James Bullard said on Wednesday. “We want to guarantee as much as possible that inflation will come down and get back on a steady path towards the 2 percent target and we don’t want to waver in that because one of the problems in the 1970s is that inflation keeps coming back came back when you thought you killed her.
Fed fund futures markets are pricing in just two more rate hikes this year, and break-even rates on inflation-linked government bonds have regained levels by the end of the year. Bullard said he was skeptical of such an inflation “crash”.
Most Fed officials seem to agree on Powell’s framework that it would take a slowdown in prices for core services other than housing to bring inflation back to 2%. This view is closely linked to falling wage growth as unemployment rises. Fed officials are forecasting the unemployment rate to rise about a percentage point in their December outlook.
“To achieve price stability, I think some easing in the economy and in the labor market is needed,” Logan said during a question-and-answer session after her speech in Austin, Texas on Wednesday. “And exactly how much, and the exact configuration of that is highly uncertain in my opinion.
Brainard is one of the few officials to offer a different perspective.
“It remains possible that a sustained weakening in aggregate demand could allow for further easing in the labor market and a fall in inflation without significant job losses,” Brainard said on Thursday.
She has not spelled out how much she prefers the rate hikes to be. However, she cited “preliminary” signs of slowing wage growth, entrenched inflation expectations and scope for lower profit margins as forces that could also lower inflation in the coming months.
Logan also said in her remarks in Austin that she would rather have risk management act on data than commit to a specific goal.
From 2016 through 2019, a period when the unemployment rate was below 5%, Powell’s “supercore” measure of CPI services minus rents averaged a 2.3% annual gain. For 2022, the measure increased by 6.2%.
Headline inflation, on the Fed’s preferred measure for the 12 months to November, was 5.5%, compared with a rate of 6.1% in the previous month.
“We still don’t have enough evidence that wage growth will evolve in a way that is consistent with 2% inflation,” said Matthew Luzzetti, chief US economist at Deutsche Bank Securities Inc.
This story was published from a wire agency feed with no changes to the text.
Get all the business news, market news, breaking news and latest news updates on Live Mint. Download the Mint News app for daily market updates. More Less Topics
Comments are closed.