By Ann Saphir and Howard Schneider
Jan 12 (Reuters) – Federal Reserve policymakers expressed relief on Thursday that inflation continued to decline in December, paving the way for a possible quarter-long rate hike. point when the US central bank meets in just under three weeks.
US consumer prices fell in December, the first month-on-month decline in more than 2 1/2 years, and core inflation slowed, official data showed on Thursday. In the 12 months to December, the so-called core CPI (which excludes energy and unprocessed food due to its higher volatility) increased by 5.7%, the smallest rise since December 2021 and further proof that the aggressive rises in Fed rates are having the desired effect.
“In fact, we are capping the economy and presumably capping inflation in the process. That means to me that I can be a bit more nuanced” in deciding the size of the next rate hikes, the chairman said. Richmond Federal Reserve Officer Tom Barkin, speaking to reporters in Richmond. After raising rates by half a point at his December meeting, Barkin was “in principle in favor of a slower but longer and potentially higher path”, depending on how inflation behaves.
“25 basis point hikes will be appropriate going forward,” Philadelphia Fed President Patrick Harker said in a speech to a local group in Malvern, Pennsylvania, adding that once rates are just above the 5%, “I hope that… is tight enough that we keep rates in place to let monetary policy do its job.”
Atlanta Fed President Raphael Bostic said in an interview with CBS News that the December inflation data was “good news.” “It really suggests that inflation is moderating and that gives me some reassurance that we could move more slowly.”
At its December meeting, the Federal Reserve set the target rate at between 4.25% and 4.5%. Since then, data has shown a moderation in inflation and a modest slowdown in the labor market from the torrid pace of job and wage growth recorded for much of 2022.
The data has kept the Federal Reserve hopeful of a “soft landing” and has led officials at the institution to talk more openly this week of raising rates again by quarter-point increases, the magnitude preferred by the Federal Reserve in recent decades.
In contrast to the first half of 2022, when the most inflation-conscious were calling for further rate hikes, no one is publicly pushing for half-point hikes, although some have been open to the idea.
“It’s encouraging that we’ve received information today that’s moving in the right direction” on inflation, St. Louis Fed President James Bullard said at an event hosted by the Wisconsin Bankers Association.
Bullard noted that inflation remains well above the Fed’s 2% target, repeating that he would like to see the central bank’s benchmark interest rate rise above 5% “as soon as possible.”
However, after a year in which he was openly in favor of larger increases, Bullard was not opposed to smaller increases in the future.
Still, Fed policymakers remain aligned around further hikes—whatever their magnitude—and a final destination above 5%.
“We still have work to do. Inflation is too high, and we will have to stay vigilant until it returns sustainably to our 2% target,” Barkin said in remarks to the Virginia Bankers Association.
The economy continues to create jobs even as growth slows, Barkin said. In any case, he said, recent data on economic activity has delayed the risk of recession.
HIGHER AND FOR LONGER?
US stocks rose after the release of CPI data. Federal Reserve interest rate futures traders are betting on a cut in hikes to a quarter of a percentage point from the January 31-February 1 meeting and a pause just below 5%, with rate cuts planned for later in the year.
This view contrasts with the stance of the Federal Reserve leadership: not just a little higher, but with a tendency to stay at that higher level for an extended period of time to get inflation to credibly slow down to a lower level. consistent with the Fed’s objective.
Minutes from the Fed’s December 13-14 meeting show that no central bank policymaker expects rate cuts in all of 2023. Atlanta Fed President Raphael Bostic said this week that his The base assumption is that rates will remain high until 2024.
While inflation over the past three months has been going in the “right direction,” Barkin said Thursday that “you have to be careful about declaring victory too soon… Inflation is going to be more persistent, it’s not going to fall without plus up to 2%”, possibly requiring rates to remain tight for longer than anticipated.
Federal Reserve policymakers have repeatedly asserted that they want to avoid repeating the mistakes of the 1970s, when the central bank raised rates and then lowered them when inflation appeared to be receding, only to have to raise yet. plus borrowing costs to get price pressures back on track.
In the end, the Federal Reserve raised borrowing costs and the US unemployment rate rose to double digits during that period, before managing to stop the upward price spiral.
Federal Reserve officials say they do not expect the unemployment rate, currently at 3.5%, to rise much more than one percentage point in the course of the current fight against inflation.
(Reporting by Ann Saphir, Lindsay Dunsmuir and Michael Derby, editing in Spanish by Tomás Cobos)