Dive brief:
- Inflation rose last month on gains in prices for homes, health care, auto insurance and other services, underscoring that the Federal Reserve may need to keep the benchmark interest rate at a 22-year high for another than previously expected.
- The the consumer price index increased by 0.3% in December, compared with 0.1% the previous month, and rose 3.4% year-on-year from 3.1% in November. A 0.5 percent increase in housing costs fueled more than half of the increase in inflation, the Bureau of Labor Statistics said.
- “There is still much work to be done to reduce services inflation,” Fitch Ratings chief economist Brian Coulton said in a statement, adding that the data complicates efforts by Federal Reserve policymakers to achieve its inflation target of 2%. “This will give the Fed reason to be cautious and they are unlikely to cut rates as quickly as markets currently expect.”
Diving knowledge:
Fed policymakers, while suggesting they are done raising borrowing costs, have kept open the option of additional interest rate hikes. They have said that a sustained decline in price pressures must precede any easing of policy.
“March is probably too early in my estimation for a rate cut because I think we need to see more evidence” of slowing inflation, Cleveland Fed President Lorreta Mester he said Thursday.
“I think the December CPI report just shows that there is more work to be done, and that work will require tight monetary policy,” Mester said in an interview with Bloomberg TV.
Mester’s comments align with a speech by the president of the New York Fed John Williams Wednesday.
The cooling of inflation over the past 18 months “is clearly a positive development, but it is important to stress that we still have a way to go to bring inflation back to the FOMC. [Federal Open Market Committee’s] long-term goal of 2%,” Williams said.
“I expect that we will need to maintain a restrictive policy stance for some time to fully achieve our objectives, and it will only be appropriate to reduce the degree of policy restriction when we are confident that inflation is moving towards 2% on a sustained basis,” Williams said in a speech.
Interest rate futures traders shrugged off December’s inflation data, along with the message from policymakers.
On Thursday, the odds that the Fed will cut the main interest rate on March 20 by a quarter of a percentage point increased to 72% from 65% on Wednesday. The central bank is currently holding the federal funds rate in a range between 5.25% and 5.5%.
“It seems to me that the markets are a little bit ahead of how many cuts the Fed should make, or probably will make, in the coming months,” former Treasury Secretary Lawrence Summers said Thursday, noting “a little more medium term inflation”. risk than what the markets see.”
US consumers see limited risk of price pressures escalating again. They expect inflation to ease to 3% a year next year to 2.5% in five years. the New York Fed said in a report Monday.
The central bank, seeing progress in its most aggressive fight against inflation in four decades, said it will likely cut the federal funds rate by the end of 2024 to 4.6%, according to an average projection by Fed officials released on December 13.
Interest rate futures traders believe the Fed will cut borrowing costs much more aggressively. On Thursday, they saw an 81% chance that the Fed by the end of 2024 will cut the main rate to 4% or less.
“I think it’s very unlikely that the Fed will start aggressive rate cuts early this year,” Glenn Hubbard, a professor at Columbia Business School, told Summers during a webinar sponsored by the Economic Club of New York. .
Core CPI (excluding volatile food and energy costs) rose 0.3% last month, unchanged from November. In year-on-year terms, the core CPI rose 3.9%, or 0.1 percentage points less than in November.
After falling for six consecutive months, the price of core goods, which includes raw materials except food and energy, was little changed in December.
