Increase in Interest Rates Has Haulted Inflation

Increase in Interest Rates Has Haulted Inflation by bloombergsubscription

The central bank has not finished its fight against inflation, but it is making progress

We are starting to get some good news on inflation. The market euphoria on November 10, when the consumer price index for October fell short of expectations, was certainly excessive. But don’t let that obscure the good news.

The CPI inflation rate is now 2.8%. During the previous months, it was 12.2%. This does not mean that inflation has fallen lastingly more than 9%. As a more realistic indicator, we can take the 12-month inflation rate, which results in 7.7% compared to 9.1% four months ago, which is good progress.

Yogi Berra once said, “When you come to a fork in the road, take it.” It may be time to slow down on rate increases, given that reading the recently released minutes of the Federal Open Market Committee meeting, many members believe they may be in for a fork now.

Since March, the Federal Reserve has been trying to catch up. The upper limit of its target range for the fed funds rate now sits at 4%, up from 0.25% when it started. The last time the committee announced its multiyear intentions, it expected to top out in the 4.5% to 4.75% range.

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Targeting 5% or 5.25%, currently being at 4%, going up 75 basis points, one meeting would seem like too much, as the FOMC acknowledges. The Fed is not about to stop yet, but it seems it is time for a downward change. It could be 50 points or even 25 at the next meeting in December. The committee can see one more CPI report before deciding. Let’s hope the report extends the “lower inflation” winning streak to five months.

FOMC members, including Mr Powell and Vice Chairman Lael Brainard, speak publicly about long delays in monetary policy. That’s another moderate sign. Why?

Pre-covid pandemic we were use to seeing a rise in the interest rates once every 3 years or so. Now, we are seeing rates increases every month.

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The effects of the Fed raising the rates too quickly can have castastrophics concequences in the economy like bringing a longer recession that may last past 2023.

Slowing rate increases is very different from stopping them. The Fed needs hard evidence that inflation is falling before it stops raising rates. The evidence so far is scant. The 12-month annual rate of 7.7% is better than its peak of 9.1% but still too high.

If we look at the Fed’s preferred measure, PCE, excluding food and energy prices, we find lower measured inflation.

Energy prices, food prices and supply chain bottlenecks have driven inflation since 2021. Supply bottlenecks are showing abatement. The average waiting time for a container after arriving at the port has been more than halved.

The Fed still has a lot of work to do. Still, the news on inflation is positive.

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