Fed would opt for 25 bps rate hikes after CPI data

Thursday’s inflation reading in the United States accelerated bets and expectations that the Fed will manage a shift from 50 basis points rate hikes to 25 bps hikes. Despite the fact that inflation has clearly slowed earlier in 2022, there are doubt that the FOMC is ready to declare mission accomplished.

Headline inflation has fallen by 2.6 percentage points since June, and the annualized run rate over the past three months is just 1.8%, demonstrating further slowing is still to come in the year-ago change.

Additional progress should be made in the coming months as goods inflation is still weak and the lagged effect of slower housing cost growth eventually flows through to the CPI data. As a result, the days of 75 bps rate hikes from the FOMC has become a part of the near history.

While Fed officials have acknowledged the recent progress and should welcome this report, like us, they remain skeptical that inflation will easily settle back down to 2% past the correction in goods and housing.

The increasingly compelling evidence of slowing inflation brought by today’s report increases the chance that the FOMC will hike the fed funds rate by just 25 bps at its next meeting, but with the trend in inflation still above target, economists expect that even if the FOMC delivers a downshift in pace, it will continue tightening past its next meeting.