As inflation begins to slow, the Federal Reserve is considering whether and when to stop increasing rates, according to The Wall Street Journal (subscription).
The context: The Fed has raised interest rates at the fastest pace since the 1980s in order to tamp down high inflation over the past year.
The shift: “Consumer prices climbed 0.1% in November from the previous month and 7.1% from a year earlier, the Labor Department said Tuesday, both down notably from comparable previous increases.”
- “The Fed pays close attention to so-called core prices, which exclude volatile food and energy categories, as a better predictor of future inflation than overall inflation. Over the past three months, core prices increased at a 4.3% annualized rate, the lowest such reading in more than one year.”
What’s next: The Fed is expected to raise the benchmark federal funds rate by half a percentage point later today—a smaller increase than their previous four.
The debate: Some experts believe that inflation will continue to slow in the coming months, and that the Fed should avoid taking actions that could create job losses and stifle economic activity. Others think that the Fed should continue to take aggressive action to prevent inflation from settling at a level that is significantly higher than the Fed’s 2% inflation target.
Our take: “Manufacturers and consumers welcome the news that pricing pressures are starting to ease, albeit at still elevated rates,” said NAM Chief Economist Chad Moutray. “The Federal Reserve is also closely watching these data for signs that it can let up on its extraordinary measures to wring inflation out of the economy. This will also hinge on labor market data, which has continued to be solid, including strong wage growth.”
- “I continue to expect a 50-basis-point increase in the federal funds rate today, along with another 75 basis points in total at the next two FOMC meetings,” said Moutray. “The Fed’s ability to hit the pause button will then depend on progress in early 2023.”