Fed seen slowing rate hikes, likely ending them below 5%
U.S. central bankers began their last policy-setting meeting of the year Tuesday with data suggesting inflation is finally cooling, allowing them to slow their interest-rate hikes into next year and, traders are now betting, stop short of 5% by March.
Federal Reserve policymakers are still seen raising the policy rate by a half of a percentage point to a range of 4.25%-4.5% on Wednesday, a smaller increase than the 75-basis-point per meeting pace they had stuck to since June but still a large increase by historical standards.
But after a Labor Department report showed consumer prices last month rose at their slowest pace in nearly a year, futures contracts tied to the Fed policy rate moved to price in a further downshift next year. Traders are now betting on 25-basis-point increases at each of the Fed’s first two meetings of 2023 and no more, with some chance the last hike could come in May instead of March.
Either way, that would bring the policy rate to the 4.75%-5% range, lower than some economists expect and markets had been betting, given what has been stubbornly high inflation and a stronger-than-expected labor market for much of this year.
Tuesday’s report showed the consumer price index rose 0.1% in November from the month prior, down from a 0.4% pace in October. The deceleration suggests that the Fed’s most aggressive set of interest-rate hikes in 40 years may finally be starting to slow demand and ease price pressures more broadly.
“Broadly speaking, this is very good news for the Fed – two sequential months of data pointing to softening in inflation,” said Subadra Rajappa, Societe Generale’s head of U.S. rates strategy.
