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

Published 15/11/2022, 10:11
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  • 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.

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