Will Fed step down pace of interest rate hiking?

Tomorrow is Jerome Powell’s last FOMC speech for 2022. The Federal Reserve has previously signaled a general tendency to step down the pace of interest rate hikes upon concluding its two-day meeting on Wednesday, with extensive expectations of a half-point rate hike to a range of 4.25% to 4.5%. Nevertheless, it is still not clear how much the November CPI inflation reading, revealed on Tuesday, will affect the rate-hike stance that the Fed will draw up in new economic projections and Fed Chair Jerome Powell’s news conference.

The US economy has so far survived the previous Fed’s aggressive rate hikes. The job market is robust, wages are growing, Americans are spending and GDP is strong. Business is also good and companies are largely surpassing revenue expectations and reporting positive earnings results.

The data may not make so much difference, some economists are extremist enough to claim that data does not even matter because the Fed has already shifted its way of thinking regarding inflation and half a point could well serve as an indication that the US central bank is retreating from its previous aggressive stance as signs begin to emerge that inflation may be easing.

The CPI inflation rate fell faster than expected in November, as so did core inflation, which excludes food and energy. The S&P 500 jumped in early Tuesday stock market action, but gave up some of its gains as investors weighed what it means for tomorrow’s Fed meeting.

The CPI inflation rate eased six-tenths of a percent from 7.7% in October, coming in below Wall Street expectations of 7.3%. The 7.1% annual gain was the lowest in a year. The consumer price index rose 0.1% on the month vs. the 0.3% expected increase.

The core CPI rose 0.2% from October. Economists had expected a 0.4% monthly increase. The annual core inflation rate eased to 6% from 6.3%. The core CPI inflation rate peaked at a 40-year-high 6.6% in September.

Markets will also receive the FOMC’s Quarterly Summary of Economic Projections including Fed members’ latest projections for the next two years, with attention largely directed to the so-called dot–plot: members’ assessment for the federal funds rate and its longer-run value. Many are expecting to see an increase in the terminal dot-plot figure to between 5.0% and 5.5%.

Boosted by the latest inflation data, the majority of economics do believe a 50bp increase is likely which would cap a run of 4 consecutive 75bp hikes seen in the prior 4 meetings. A 50bp move would push the Fed’s target range to 4.25%-4.50%. The target rate probabilities shows an 80.0% probability for a 50bp hike over a 20% chance for a 75bp increase.

A 50bps rate hike could mean it won’t be a surprise to hear Powell hinting at a possible 25bp hike for February’s meeting as the US Dollar Index is still fluctuating around 105.80. The Fed is not acting in isolation. Nine central banks are also expected to make a rate announcement this week. Soft landing on the ever-narrowing path between high inflation and recession is a worldwide concern irritating central banks across the world and impose similar economic problems.

The Bank of England, the Swiss National Bank as well as the ECB are expected to follow on the footsteps of the Fed with half-point moves of their own on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.