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Fed's Harker sees 'surprising' inflation data in hindsight after December slowdown

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Inflationary pressures eased again in December, likely giving Federal Reserve officials more confidence that a continued slowdown in their interest rate hikes is warranted.

In the last month of 2022, inflation as measured by the Consumer Price Index showed that prices rose 6.5% year-on-year, while falling 0.1% month-on-month.

Philadelphia Fed President Patrick Harker said Thursday morning that he expects the “astonishing” inflation readings for 2022 to be behind us and that it makes sense to slow the pace of rate hikes.

“I expect we will raise rates a few more times this year, although in my opinion the days of going up 75 basis points each time are certainly over,” Harker said in prepared remarks ahead of the CPI report in Malvern. , SHOVEL. “In my opinion, increases of 25 basis points will be appropriate going forward.”

NEW YORK, NEW YORK - SEPTEMBER 27: Philadelphia Federal Reserve Chairman Patrick Harker visits

Philadelphia Federal Reserve Chairman Patrick Harker in New York City on September 27, 2019. (Photo by John Lamparski/Getty Images)

The Fed raised rates by 0.50% after its December policy meeting, a slowdown after four successive 0.75% rate hikes. In 2022, the Fed raised rates by a cumulative 4.25%, or 425 basis points.

CME Group data on Thursday showed a 91% probability that the Fed will raise rates by 0.25% at the conclusion of its next policy meeting on Feb. 1.

Harker said sometime this year that he expects the interest rate to be tight enough for the Fed to keep rates in place to allow monetary policy to do its job.

The consumer price index fell a tenth of a percent month-on-month in December and rose 6.5% year-on-year – a slowdown from 7.1% in November, Bureau of Labor Statistics data showed on Thursday.

Excluding volatile energy and food prices to get the so-called “core” number that the Fed favors, the core consumer price index rose 0.3% in December after rising 0.2% in November. In the annual comparison, the core consumer price index rose 5.7%, below the 6% observed in November.

The main metric the Fed is focusing on – services inflation excluding housing – rose 0.4% mom and 7.4% mom in December. The Fed sees utility inflation being driven by a strong job market and wage growth.

Persistent wage growth could keep services inflation warm in 2023, and while the slowdown in wage growth in December is welcome for the Fed, this data does not yet suggest a broader labor market slowdown.

After Thursday’s inflation data, Roberto Perli, head of global policy at Piper Sandler, said that even with a continued slowdown in price increases, the Fed might not be convinced to reduce its most recent pace of increases from 0, 50% on interest rates.

“I’m hesitant to back the farm at 25 basis points,” Perli said. “Ex-shelter basic services are still high, as a result I think 50 basis points remain on the table. But also because in the minutes of the [last meeting], the FOMC said it is not satisfied with the way the market disrupts our reaction function. So if there’s a way the FOMC can think of getting the market to believe more in their hawkish reaction function, it would be to do 50 basis points.”

Perli also sees Thursday’s report keeping the Fed on track to raise its benchmark rate above 5%, as indicated at the December policy meeting.

“This latest report adds further weight to our view that CPI inflation will decline faster than the Fed expects this year,” Paul Ashworth, an economist at Capital Economics, wrote in a note to clients on Thursday. “But the Fed won’t stop raising interest rates until it sees evidence of an easing in job market conditions and wage growth. It will be a few more months before that evidence is also irrefutable.”

Earlier this week, Fed Chair Jerome Powell highlighted the Fed’s commitment to reducing inflation, championing aggressive central bank rate hikes as necessary, even if unpopular.

Powell noted in a speech on central bank independence that “restoring price stability when inflation is high may require measures that are not popular in the short term as we raise interest rates to slow the economy.”

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