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Fed officials see ‘startling’ inflation data back after December decline

Inflationary pressure eased again in December, giving some Federal Reserve officials more confidence that a continued slowdown in rate hikes is warranted.

In the last month of 2022, inflation measured by the consumer price index showed that prices rose 6.5% compared to last year, while they fell 0.1% compared to the previous month.

Philadelphia Fed President Patrick Harker said Thursday morning that he expects the “shocking” inflation readings from 2022 to be behind us and that it makes sense to slow the pace of rate hikes.

“I expect we will raise rates a few more times this year, but in my view the days of raising them 75 basis points at a time have certainly passed,”[ads1]; Harker said in remarks prepared ahead of the CPI report in Malvern, PA. “In my view, increases of 25 basis points would be appropriate going forward.”

Fed officials see ‘startling’ inflation data back after December decline

Philadelphia Federal Reserve President Patrick Harker in New York City on September 27, 2019. (Photo: John Lamparski/Getty Images)

In a separate appearance Thursday, St. Louis Fed President James Bullard called the latest CPI report “encouraging” but said inflation remains high, suggesting he may favor another 50 basis point rate hike at the Fed’s next policy meeting.

“I like the front-loading policy,” Bullard said at the Midwest Economic Forecast Forum for the Wisconsin Bankers Association. “I think if we want to get to the low 5% range [for the Fed funds rate] that we should go ahead and move to that level … I don’t see the purpose of dragging things out through 2023.”

Bullard said that while the CPI number for December was encouraging, “I think we have a lot of work to do as a Fed to make sure we get lower inflation going forward.”

Federal Reserve Bank of St. Louis President James Bullard chats, during a break at a conference on monetary policy at Stanford University's Hoover Institution, in Palo Alto, California, U.S. May 6, 2022. This picture is taken May 6, 2022. REUTERS/Ann Saphir

Federal Reserve Bank of St. Louis President James Bullard chats, during a break at a conference on monetary policy at Stanford University’s Hoover Institution, in Palo Alto, California, U.S. May 6, 2022. Picture taken May 6, 2022. REUTERS/Ann Saphir

The Fed raised interest rates by 0.50% after its December policy meeting, a decrease after four consecutive rate hikes of 0.75%. In 2022, the Fed raised interest rates by 4.25 percent, or 425 basis points.

Data from CME Group on Thursday showed a 91% probability that the Fed will raise interest rates by 0.25% at the conclusion of its next policy meeting on February 1.

Harker said at one point this year that he expects the key interest rate to be restrictive enough that the Fed will hold interest rates in place to allow monetary policy to do its job.

The consumer price index fell a tenth of a percent month-over-month in December and rose 6.5% year-over-year — down from 7.1% in November, data from the Bureau of Labor Statistics showed Thursday.

Stripping out volatile energy and food prices to get the so-called “core” number favored by the Fed, the core CPI rose 0.3% in December, after rising 0.2% in November. Year-on-year, the core CPI rose by 5.7%, down from 6% in November.

The key measure the Fed is focusing on – services inflation excluding housing – rose 0.4% month-on-month and 7.4% year-on-year in December. The Fed sees inflation in core services being driven by a strong labor market and wage growth.

Sustained wage growth could keep services inflation warm in 2023, and while December’s slowdown in wage growth is welcome for the Fed, these data do not yet suggest a broader slowdown in the labor market.

After Thursday’s inflation data, Roberto Perli, head of global policy at Piper Sandler, said that even with a continued slowdown in rate hikes, the Fed may not be convinced to slow down from its recent pace of 0.50% rate hikes.

“I’m hesitant to bet the farm on 25 basis points,” Perli said. “Core services ex shelter are still high, as a result I think 50 basis points remain on the table. But also because in the minutes of [last meeting]The FOMC said they are not happy with how the market is interrupting our reaction function. So if there’s one way that the FOMC can think about getting the market to believe more in their hawkish reaction function, it would be to do 50 basis points.”

Perli also sees Thursday’s report as keeping the Fed on track to raise the key rate above 5%, as written into December’s policy meeting.

“This latest report adds more weight to our view that CPI inflation will fall faster than the Fed expects this year,” Paul Ashworth, an economist for Capital Economics, wrote in a note to clients on Thursday. “But the Fed is not going to stop raising interest rates until it sees accompanying evidence of an easing in labor market conditions and wage growth. It will take a few more months for that evidence to be irrefutable as well.”

Earlier this week, Fed Chairman Jerome Powell stressed the Fed’s commitment to bringing down inflation, defending the central bank’s aggressive rate hikes as necessary even if they are unpopular.

Powell noted in a speech on central bank independence that “restoring price stability when inflation is high may require actions that are unpopular in the short term as we raise interest rates to slow the economy.”

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