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Fed officials see 'eye-popping' inflation data in rearview after December slowdown

Inflation pressures eased again in December, giving some Federal Reserve officials more confidence that a continued slowdown in its interest rate increases is warranted.

In the final month of 2022, inflation as measured by the Consumer Price Index showed prices rose 6.5% over last year while falling 0.1% over the prior month.

Philadelphia Fed President Patrick Harker said Thursday morning he expects the "eye-popping" inflation readings of 2022 are behind us, and that it makes sense to slow down the pace of rate hikes.

"I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed," Harker said in remarks prepared ahead of the CPI report in Malvern, PA. "In my view, hikes of 25 basis points will be appropriate going forward."

NEW YORK, NEW YORK - SEPTEMBER 27: Philadelphia Federal Reserve President Patrick Harker visits
Philadelphia Federal Reserve President Patrick Harker in New York City on September 27, 2019. (Photo by John Lamparski/Getty Images) (John Lamparski via Getty Images)

In a separate appearance on Thursday, St. Louis Fed president James Bullard called the latest CPI report "encouraging," but said inflation is still high, suggesting he may favor another 50 basis point rate hike at the Fed’s next policy meeting.

"I like the front-loading policy," Bullard said at the Midwest Economic Forecast Forum for the Wisconsin Bankers Association. "I think if we want to get to the low 5% range [for the Fed funds rate] that we should go ahead and move to that level…I don’t see the purpose of dragging things out through 2023."

Bullard said that while the December CPI number was encouraging, "I think we have a lot of work to do as a Fed in order to make sure that we get inflation lower going forward."

The Fed raised rates by 0.50% following its December policy meeting, a slowdown after four successive interest rate increases of 0.75%. In 2022, the Fed raised rates by a cumulative 4.25%, or 425 basis points.

Data from the CME Group on Thursday showed a 91% probability the Fed raises rates by 0.25% at the conclusion of its next policy meeting on Feb. 1.

Federal Reserve Bank of St. Louis President James Bullard chats, during a break at a conference on monetary policy at Stanford University's Hoover Institution, in Palo Alto, California, U.S. May 6, 2022. Picture taken May 6, 2022. REUTERS/Ann Saphir
Federal Reserve Bank of St. Louis President James Bullard chats, during a break at a conference on monetary policy at Stanford University's Hoover Institution, in Palo Alto, California, U.S. May 6, 2022. Picture taken May 6, 2022. REUTERS/Ann Saphir (Ann Saphir / reuters)

Harker said at some point this year, he expects that the policy rate will be restrictive enough the Fed will hold rates in place to let monetary policy do its work.

The consumer price index fell one tenth of a percent month-over-month in December and rose 6.5% year-over-year — a slowdown from 7.1% in November, data from the Bureau of Labor Statistics showed Thursday.

Stripping out volatile energy and food prices to get the so-called "core" number the Fed favors, core CPI inched up 0.3% in December, after rising 0.2% in November. Year-over-year, core CPI rose 5.7%, down from the 6% seen in November.

The key metric the Fed is focusing on — services inflation excluding housing — rose 0.4% month-over-month and 7.4% year-over-year in December. The Fed sees core services inflation being driven by a strong job market and wage growth.

Persistent wage growth could keep services inflation running hot in 2023, and though December's slowdown in wage growth is welcome for the Fed, this data does not yet suggest a broader slowing of the job market.

Following Thursday's inflation data, Roberto Perli, head of global policy at Piper Sandler, said even with a continued slowing in price increases, the Fed may not be convinced to step down from its most recent pace of 0.50% interest rate increases.

"I'm hesitant to bet the farm on 25 basis points," said Perli. "Core services ex shelter is still high as a result I think 50 basis points remains on the table. But also because in the minutes from the [last meeting], the FOMC said they are not happy with how the market interrupts our reaction function. So if there’s a way that the FOMC can think of making the market believe more in their hawkish reaction function would be to do 50 basis points."

Perli also sees Thursday's report keeping the Fed on track to raise its policy rate above 5%, as was penciled in in December’s policy meeting.

"This latest report adds more weight to our view that CPI inflation will fall more rapidly than the Fed expects this year," Paul Ashworth, economist for Capital Economics, wrote in a note to clients on Thursday. "But the Fed isn’t going to stop raising interest rates until it sees accompanying evidence of an easing in labor market conditions and wage growth. It will be a couple more months before that evidence is also irrefutable."

Earlier this week Fed Chair Jerome Powell underscored the Fed’s commitment to bringing down inflation, defending the central bank’s aggressive rate hikes as necessary even if unpopular.

Powell noted in a speech on central bank independence that “restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

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