Fed policymakers indicate a slowing of rate hikes but no easing

The so-called core Consumer Price Index (CPI) climbed by 5.7% in the 12 months leading up to December, marking the weakest advance since December 2021.

On Thursday, policymakers at the Federal Reserve expressed relief that price pressures were easing, which paves the way for a possible slowdown in interest rate hikes. However, they signalled that the United States central bank’s target rate was still likely to rise above 5% and stay there for some time, despite market bets to the contrary.

Consumer prices in the United States dropped in December, marking the first month-to-month decline in more than two and a half years, and underlying inflation slowed, according to data released by the government on Thursday. This provides further evidence that the Federal Reserve’s aggressive policy tightening last year is having the desired effect.

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The so-called core Consumer Price Index (CPI) climbed by 5.7% in the 12 months leading up to December, marking the weakest advance since December 2021.

Bullard pointed out that inflation is still quite a bit higher than the 2% target that the Fed has set for itself, and he reiterated his opinion that he would like to see the policy rate of the central bank, which is now in the range of 4.25%-4.50%, reach north of 5% “as soon as practicable.”

After that, he said, “We are really moving into an era of higher nominal interest rates for quite a while going forward as we try to continue to put downward pressure” on inflation.

But Bullard did not argue against the prospect that the Federal Reserve may raise interest rates by 25 basis points at its meeting on January 31 and February 1. This would be a less significant increase than the increase of 0.5 percentage points that was implemented in December.

In addition to mentioning that he favours “front-loading” policies and would prefer to avoid dragging out the process of rate rises, Bullard stated that the strategies used to get higher rates are not all that important.

U.S. stocks went up after the release of the CPI data, and traders of futures tied to the Fed’s policy rate bet heavily on a downshift to quarter-percentage-point hikes starting at the Jan. 31-Feb. 1 meeting, as well as a pause just below 5%, with rate cuts priced in for later in the year. This led to a rise in the price of U.S. stocks.

“STEER MORE CAREFULLY”

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, expressed his opinion to a business organisation in Pennsylvania on Thursday that he feels rate rises of a quarter of a percentage point are acceptable at this time.

But he also stated that he thinks the Fed’s policy rate will need to go higher than 5% in order to tame inflation, which according to the central bank’s preferred measure is running nearly three times its target, and stay there for some time. This is something he believes will be necessary in order to control inflation.

According to the minutes from the Federal Reserve’s meeting held on December 13-14, it was revealed that no central bank policymaker at that time anticipated any rate cuts for the entirety of 2023. Furthermore, Atlanta Fed President Raphael Bostic stated earlier this week that his base case is for there to be no such thing in 2019.

Tom Barkin, president of the Federal Reserve Bank of Richmond, stated on Thursday that inflation over the course of the previous three months has moved in the “correct direction,” which enables the Federal Reserve to “steer more deliberately” in its fight against price pressures.

Speaking at an event that was organised by the Virginia Bankers Association and the Virginia Chamber of Commerce, Barkin did not say whether or not he supports a smaller rate hike at the meeting that will take place on January 31 and February 1, nor did he say how high he expects rates to need to go in order to meet their objectives.

However, policymakers at the Fed have stated on multiple occasions that they want to avoid repeating the mistakes that were made during the 1970s. During that time period, the central bank raised interest rates, then lowered them when it appeared that inflation was abating. However, they later had to raise borrowing costs even further in order to bring price pressures back into line.

Before putting a halt to the ever-increasing rate of inflation, the Federal Reserve finally drove both interest rates on loans and the unemployment rate in the United States into double digits during that time period.

The unemployment rate is now at 3.5%, and Fed policymakers have stated that they do not anticipate it to grow by much more than one percentage point in the course of the ongoing struggle against inflation.