(Boursier.com) — After yesterday’s report on the US CPI, reflecting a slowdown in US inflation, back to its lowest level since January, several Fed officials have softened their rhetoric. Philadelphia Fed chief Patrick Harker (non-voting) said he was in favor of a pause once the fed funds rate reached around 4.5%. Dallas Fed leader Lorie Logan (non-voting) indicated that it may soon be appropriate to slow the pace of increases, although there is still a long way to go to reduce inflation. San Francisco Fed boss Mary Daly (non-voting) also said it was now appropriate to consider slowing the pace of rate increases, although the pause was not yet a talking point. Voting member Loretta Mester of the Cleveland Fed, however, said the Fed should go ahead with rate hikes and that the biggest risk still would be to tighten too little.
Some Wall Street economists, agreeing with Mester’s view, report that Fed policy is unlikely to change just yet. Citi economists wrote that the ‘softer’ reading of inflation did not significantly affect their view of inflation, especially that of the services sector. They continue to expect a maximum federal funds rate of 5.25-5.5%. Jefferies economists meanwhile recalled repeated Fed comments that the US central bank would like to see a series of ‘softer’ inflation readings.
The US consumer price index for October 2022 was up 0.4% compared to the previous month, against a FactSet consensus of 0.6%. Excluding food and energy, the CPI rose by 0.3% compared to the previous month, against 0.5% market consensus. Over one year, the consumer price index rose by 7.7%, against 7.9% consensus and 8.2% a month earlier. Excluding food and energy, the US consumer price index rose 6.3% over one year, against 6.5% consensus and 6.6% a month earlier.
According to the CME Group’s FedWatch tool, the probability of a rate hike of 50 basis points on December 14, at the end of the next monetary meeting, would now be more than 85%, against less than 15% for the probability of an oversized new move by 75 basis points. Before the publication of the consumer price index, these two probabilities were roughly equivalent. The markets are therefore hoping that the American central bankers will moderate their enthusiasm and slow down the hitherto frantic pace of rate hikes. The Fed has in fact just raised its rates four times by 75 basis points, which poses the risk of a deep recession.