Fresh data showing inflation eased in December are likely to keep the Fed on track to reduce the size of interest-rate increases to a quarter-percentage-point at their meeting that concludes on Feb. 1.
The Labor Department reported Thursday that consumer prices fell in December, largely reflecting lower energy prices. The consumer-price index declined 0.1% from November. The index was up 6.5% for the year, down from a recent peak increase of 9.1% in June.
The core CPI index, which excludes volatile food and energy items, rose 0.3% from November, and the 12-month increase edged lower to 5.7%, from 6.6% in September. On a three-month annualized basis, core inflation was 3.1%, the lowest such rate in more than a year and down from 7.9% in June.
Fed officials have kept their options open on whether to raise rates by either a quarter percentage point or a half percentage point at their next meeting, saying that the decision would be strongly guided by the latest data about the state of the economy.
But the improving inflation data suggest officials will strongly consider the smaller increase of a more traditional quarter point, or 25 basis points. It takes time for them to see the full effects of their policy actions, and they are trying to avoid causing unnecessary declines in employment and growth.
“In my view, hikes of 25 basis points will be appropriate going forward,” said Philadelphia Fed President
Patrick Harker
in remarks Thursday morning.
After holding rates near zero for two years following the onset of the coronavirus pandemic, officials raised borrowing costs more aggressively last year than at any time since the early 1980s. They lifted their benchmark federal-funds rate most recently by a half percentage point in December, to a range between 4.25% and 4.5%, following four consecutive increases of 0.75 percentage point.
Fed policy makers want the economy to slow down to cool demand and reduce inflation. Recent data suggest hiring has held steady, but a separate Labor Department report last week indicated wage growth moderated at the end of last year. Wage figures are important to the Fed because officials are nervous that the labor market’s strength could sustain wage growth that keeps inflation, as measured by their preferred Commerce Department gauge, above their 2% target.
Prices of goods such as used cars are declining, a development the Fed has anticipated for more than a year. There is evidence that soaring rents and other housing costs are set to cool notably amid a sharp slowdown in demand, though that won’t be immediately reflected in the CPI because of how it is constructed.
Fed Chair
Jerome Powell
has recently shifted the focus away from core inflation measures toward an even narrower subset of labor-intensive services by excluding prices for food, energy, shelter and goods. Officials believe that category could help show whether labor shortages that have been pushing up wages are passing through to consumer prices.
“We welcome these better inflation reports…but I think we’re realistic about the broader project,” Mr. Powell said last month. Despite progress on goods and housing inflation, “the big story will really be the rest of it, and…that’s going to take time.”
In an interview Monday, San Francisco Fed President Mary Daly said, “I’m going to be paying a lot of attention to core services ex-housing because I’d like to see some improvement there.” That subset of prices rose 0.26% in December, well below last year’s monthly average of around 0.5%, according to economists at Morgan Stanley.
Officials are trying to balance the risk of raising rates too much with the risk of not doing enough to slow down spending and investment, which could allow higher inflation to become entrenched.
Mr. Powell said last month it was “broadly right” that the Fed’s best way to manage the risk of over-tightening would be to slow rate increases to smaller 0.25-point increments as soon as the central bank’s next meeting.
“It makes a lot of sense, it seems to me—particularly if you consider how far we’ve come,” Mr. Powell said. But he said the Fed’s actions would depend significantly on new information about the state of the economy and borrowing conditions.
Ms. Daly appeared to endorse Mr. Powell’s thinking about how to balance the risks facing the Fed on Monday. “When you’re being seriously data dependent, doing it in more gradual steps does give you the ability to respond to incoming information and account for those lags,” she said.
Most Fed policy makers last month anticipated that they would need to raise the fed-funds rate to a level above 5% this year. “I think it would behoove the committee to get into that zone as soon as we can without ignoring the data,” St. Louis Fed President James Bullard told reporters last week.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Fresh data showing inflation eased in December are likely to keep the Fed on track to reduce the size of interest-rate increases to a quarter-percentage-point at their meeting that concludes on Feb. 1.
The Labor Department reported Thursday that consumer prices fell in December, largely reflecting lower energy prices. The consumer-price index declined 0.1% from November. The index was up 6.5% for the year, down from a recent peak increase of 9.1% in June.
The core CPI index, which excludes volatile food and energy items, rose 0.3% from November, and the 12-month increase edged lower to 5.7%, from 6.6% in September. On a three-month annualized basis, core inflation was 3.1%, the lowest such rate in more than a year and down from 7.9% in June.
Fed officials have kept their options open on whether to raise rates by either a quarter percentage point or a half percentage point at their next meeting, saying that the decision would be strongly guided by the latest data about the state of the economy.
But the improving inflation data suggest officials will strongly consider the smaller increase of a more traditional quarter point, or 25 basis points. It takes time for them to see the full effects of their policy actions, and they are trying to avoid causing unnecessary declines in employment and growth.
“In my view, hikes of 25 basis points will be appropriate going forward,” said Philadelphia Fed President
Patrick Harker
in remarks Thursday morning.
After holding rates near zero for two years following the onset of the coronavirus pandemic, officials raised borrowing costs more aggressively last year than at any time since the early 1980s. They lifted their benchmark federal-funds rate most recently by a half percentage point in December, to a range between 4.25% and 4.5%, following four consecutive increases of 0.75 percentage point.
Fed policy makers want the economy to slow down to cool demand and reduce inflation. Recent data suggest hiring has held steady, but a separate Labor Department report last week indicated wage growth moderated at the end of last year. Wage figures are important to the Fed because officials are nervous that the labor market’s strength could sustain wage growth that keeps inflation, as measured by their preferred Commerce Department gauge, above their 2% target.
Prices of goods such as used cars are declining, a development the Fed has anticipated for more than a year. There is evidence that soaring rents and other housing costs are set to cool notably amid a sharp slowdown in demand, though that won’t be immediately reflected in the CPI because of how it is constructed.
Fed Chair
Jerome Powell
has recently shifted the focus away from core inflation measures toward an even narrower subset of labor-intensive services by excluding prices for food, energy, shelter and goods. Officials believe that category could help show whether labor shortages that have been pushing up wages are passing through to consumer prices.
“We welcome these better inflation reports…but I think we’re realistic about the broader project,” Mr. Powell said last month. Despite progress on goods and housing inflation, “the big story will really be the rest of it, and…that’s going to take time.”
In an interview Monday, San Francisco Fed President Mary Daly said, “I’m going to be paying a lot of attention to core services ex-housing because I’d like to see some improvement there.” That subset of prices rose 0.26% in December, well below last year’s monthly average of around 0.5%, according to economists at Morgan Stanley.
Officials are trying to balance the risk of raising rates too much with the risk of not doing enough to slow down spending and investment, which could allow higher inflation to become entrenched.
Mr. Powell said last month it was “broadly right” that the Fed’s best way to manage the risk of over-tightening would be to slow rate increases to smaller 0.25-point increments as soon as the central bank’s next meeting.
“It makes a lot of sense, it seems to me—particularly if you consider how far we’ve come,” Mr. Powell said. But he said the Fed’s actions would depend significantly on new information about the state of the economy and borrowing conditions.
Ms. Daly appeared to endorse Mr. Powell’s thinking about how to balance the risks facing the Fed on Monday. “When you’re being seriously data dependent, doing it in more gradual steps does give you the ability to respond to incoming information and account for those lags,” she said.
Most Fed policy makers last month anticipated that they would need to raise the fed-funds rate to a level above 5% this year. “I think it would behoove the committee to get into that zone as soon as we can without ignoring the data,” St. Louis Fed President James Bullard told reporters last week.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8