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Fed Aims to Slow Pace of Rate Increases but U.S. Inflation Still High

Published 11/15/2022, 05:11 AM
Updated 07/09/2023, 06:31 AM
  • Fed governor warns against overreacting to October decline in CPI
  • Fed funds futures show Fed rate topping 5% by spring
  • German labor unions seek big wage hikes as ECB worries about inflation

Investors are confused after US inflation, as measured by the consumer price index (CPI), declined in October from the previous month, but they’re not alone—Federal Reserve policymakers also seem a bit befuddled.

Fed Vice Chair Lael Brainard, a Treasury Department veteran who has spent more than eight years on the central bank’s board of governors, yesterday suggested that the policy committee could soon slow the pace of rate increases after four successive hikes of 75 basis points (bp).

But Chris Waller, a Fed governor who formerly was chief economist at the St. Louis Fed, said the markets have overreacted to the CPI figure, which showed inflation slowing to 7.7% on the year in October, down from 8.2% the previous month.

“It was just one data point,” Waller said Sunday in Sydney.

“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go.”

It’s not the first time over the past year when inflation came down, he recalled, only to come back. The CPI measure peaked in June at 9.1% on the year. The October rate is still very high and well above the Fed’s 2% target.

The New York Fed’s survey of consumer expectations of inflation, conducted before the CPI number last week, rose a half-point in October to 5.9% for the year ahead and 0.2 points to 3.1% for the three-year outlook.

Waller’s comments don’t contradict Brainard’s and he even said a slower pace of increases is likely but does not mean a softening of the Fed’s stance on inflation.

Still, members of the Federal Open Market Committee are obviously struggling to find the right gauge for rate increases stiff enough to slow inflation.

Bond yields fell and stock prices surged after that CPI report on Thursday. The 10-year Treasury note yield declined about 30 bp and in Europe, the benchmark German 10-year yield fell nearly 20 bp.

But the next day the Treasury yield bounced back several basis points and the German yield went back above 2%. Stock prices wavered on Monday as investors weighed the remarks from the two Fed policymakers.

Analysts have ratcheted down expectations for a rate hike at the FOMC meeting Dec. 13-14 to 50 bp. But they have taken Fed Chairman Jerome Powell’s words to heart and shifted their focus to the endpoint for the overnight Fed funds rate. Futures now forecast that rate reaching 5%-5.25% in the spring from 3.75%-4% currently.

In Europe, Germany’s powerful labor unions are pushing for big wage increases after inflation there topped 10% in October. Employers are trying to soften wage demands with one-time bonuses to cushion inflation, but negotiations will be tough and there are likely to be strikes.

The worry for policymakers at the European Central Bank is that the wage demands could cement inflation expectations at a high level. The German government has suggested making one-time payments tax-free to provide an additional incentive.

Britain, meanwhile, is preparing across-the-board tax increases to plug a gaping hole in the budget, which will be announced this coming Thursday. Some £20 billion in tax hikes will be accompanied by £35 billion in spending cuts, re-introducing an austerity that the ruling Conservative Party had hoped to leave behind.

This won’t make the Bank of England’s task any easier as it tries to tighten monetary policy to tame CPI inflation over 10% in September. Recession is inevitable and may already have begun.

Latest comments

Even with 50 Bps, hike is hike. Conditions are tightening. Lets not forget 95B QT. Moreover, November CPI will be high given crude oil hovering around $90 vs. below $80 in October. Im #shorting
yes its always puzzling why traders will now spend 6% or more for a stock because fed is "only" hiking 50bps.  they will continue to hike as even at 7.7% its still 3.5x the target rate.  Long way to go.  and dont understand why people are going long when the Fed's job is to ****demand by softening the economy.... i.e. less earnings.
f of these ********
Strong retail numbers indicate that the economy is not slowing. 75bps rate hike in December.
well it is slowing, but agree, still ridiculous amount of demand.   I think 75bps is warranted but i think politically, they will stick with 50bps.  i hopw you are right and I am wrong as the only way to get back to normal is Volker-style.
More market manipulation.
it's not that confusing - it was the run up to the mid terms and Biden used up almost all the Strategic oil reserves for political purposes- draining these vital war time reserves to keep a lid on gas prices at the pump - for diesel  - for pretty much all transport and more - to keep these prices down and therefore overall inflation down - now he has to resupply these reserves at higher prices, so it up up and away for inflation again now that the mid terms are done and dusted - it's so obvious!!! nothing confusing at all! Meanwhile OPEC plus will continue to keep a tight lid on supply as the global economy in many parts is already in massive contraction / recession and the US is close behind - so high oil prices, high inflation and depression - stock market will wake up soon enough to the hopium!!
Stagflation is my base case.
depression in the making
doubt it will be depression.  recession yes. over tightening, yes.    Say hi to Carol for me.
Thank you for sharing the article 👍
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