News from the Financial Associated Press, Shanghai, January 28 (edited by Huang Junzhi)With Fed policymakers finally making some sustained progress in curbing high inflation, the Fed is widely expected to raise interest rates by just 25 basis points next week, with some traders now boldly predicting that the Fed will not raise interest rates until March until.
Data show that the Fed’s most valued inflation indicator personal consumption expenditures (PCE) price index rose 5.0% in December from a year earlier, the lowest level since September 2021. Core personal consumption expenditures (PCE), which the Fed uses to measure inflation’s underlying momentum after excluding volatile factors, rose 4.4% year-on-year, the slowest growth rate since October 2021.
The rapid cooling in inflation has traders betting that the Fed will soon end its most aggressive tightening program since the 1980s.
Last year, the Fed quickly raised interest rates from near zero in March to a range of 4.25%-4.5% in December in an effort to curb the worst inflation in decades. The Fed’s dot plot shows policymakers’ median forecasts point to rates rising above 5% by the end of the year.
“With inflation cooling, the Fed could reasonably slow down the pace of rate hikes next week,” said Jeffrey Roach, chief economist at LPL Financial.
Futures linked to the Fed’s policy rate show that the Fed is likely to raise interest rates by 25 basis points at its monetary policy meeting from January 31 to February 1.
Other price data also converged. A survey released late Friday showed U.S. consumers’ inflation outlook for the year ahead fell to the lowest level since April 2021. The University of Michigan reported that final inflation expectations fell to 3.9% in January from an initial reading of 4.0%, and five-year inflation expectations fell to 2.9% from 3.0%.
Fed vs Traders
Fed policymakers have signaled that they expect rates to end up slightly higher, to just above 5%, and have warned that they do not expect to cut rates this year to ensure they are certain to win the war on inflation.
But traders see only a one-in-three chance of a further 25 basis point hike after March. Traders have strengthened bets that the Federal Reserve will start cutting interest rates as early as September after government reports showed consumers are also pulling back on spending.
Consumer spending accounts for more than two-thirds of U.S. economic activity, so signs of slowing growth, coupled with manufacturing also in the early stages of a downturn, raise the risk of a recession in the second half of the year.
While the Fed has insisted that interest rates will remain at peak levels for some time, it is seen as buckling if inflation continues to retreat and the economy becomes too sluggish under the weight of its monetary tightening.
“Given that rate hikes are now clearly a heavy drag on demand, we expect core inflation to continue to slow this year, which should eventually convince the Fed to start cutting rates later this year,” said Paul Ashworth, chief North American economist at Capital Economics.