Fed officials hail October CPI but still foresee tougher policy ahead

Fruit and vegetable prices are displayed at a store in Brooklyn, New York, March 29, 2022.

andrew kelly | Reuters

Federal Reserve officials welcomed Thursday’s news that inflation rose less than expected last month, and they noted that interest rate hikes could slow.

But they also cautioned against getting too excited about the data, saying prices are still far too high.

“A month of data doesn’t equal a win, and I think it’s really important to think that this is just positive information, but we’re looking at a whole set of information,” the company said. San Francisco Fed President Mary Daly. during a question-and-answer session with the European Economic and Financial Centre.

Daly and other Fed officials spoke after the Bureau of Labor Statistics announced that the consumer price index rose 0.4% in October, below the estimate of 0, 6% of the Dow Jones. The data sent a possible signal that although inflation is still elevated, price increases may have leveled off and may soon decline.

Markets staged a massive rally following the report, with the Dow Jones Industrial Average climbing more than 1,000 points. The policy-sensitive 2-year Treasury yield fell 30 basis points, or 0.3 percentage points, to 4.33%.

While Daly said the report was “good news indeed”, she noted that inflation at an annual rate of 7.7% is still far too high and well below the 2% target of the central bank.

“It’s better than more than 8 [percent] but it’s by no means close enough to 2 for me to be comfortable,” she said. “So it’s nowhere near a win.”

Similarly, Cleveland Fed Chair Loretta Mester said Thursday’s report “suggests some easing in headline and core inflation,” though she noted the trend is still “unacceptably high.” “.

Kansas City Fed President Esther George noted that even with the smaller monthly gain, inflation is still “uncomfortably close” to the annual high reached in 41 years this summer.

“With inflation still high and likely to linger, monetary policy clearly has more work to do,” she said.

However, she advocated a more “deliberate” approach going forward, noting that “the timing is particularly important to avoid contributing unduly to financial market volatility.”

Both Mester and George are voting members this year on the Federal Open Market Committee responsible for setting rates.

Market price in lower bulls

The Fed has raised its benchmark interest rate six times this year for a total of 3.75 percentage points. That included a series of four consecutive 0.75 percentage point hikes, the most aggressive policy tightening since the central bank decided to use the overnight rate as its primary policy tool in 1990.

Market prices reacted immediately to the CPI news, jumping sharply to the likelihood of a 0.5 percentage point rise in December, according to CME Group data calling for an 85.4% chance of an increase of half a point.

“Despite the actions we have taken so far, given that inflation has always proven to be more persistent than expected and that maintaining high inflation has significant costs, I currently consider the greater risks come from too little tightening,” Mester said.

Other officials were also cautious.

Dallas Fed President Lorie Logan called the CPI report a “welcome relief,” but noted that more rate hikes are likely to come, albeit at a slower pace. “I think it may soon be appropriate to slow down the pace of rate increases so that we can better assess changing financial and economic conditions,” she said.

No rate cut in sight

Like Daly, Logan said the public shouldn’t interpret a slower pace of rate hikes to mean policy easing.

In particular, Daly said rates are likely to stay higher for longer and she doesn’t expect a rate cut that market prices could take as early as September 2023.

Earlier in the day, Philadelphia Fed President Patrick Harker indicated that a slower pace is likely, but noted that increases will remain large.

Historically, the US central bank has preferred to increase in quarter-point increments, but the rapid rise in inflation and a slow response from policymakers when prices started to climb in early 2021 necessitated a faster pace. aggressive.

“Over the next few months, in light of the cumulative tightening we have achieved, I expect that we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance. But I want to be clear: a 50 basis point rate hike will always matter,” Harker said.

He added that he expects policy to “hold on to a restrictive rate” as the Fed assesses the impact of the measures on the economy.

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