Will “sticky” inflation stop the Federal Reserve from lowering interest rates? Some strategists are worried that inflation will not fall sufficiently for the Fed to start easing in 2024.
Fed policymakers are not expected to alter their benchmark rate at their Tuesday-Wednesday meeting this week. But by December 2024, the futures market anticipates that the fed funds rate will be as much as a full percentage point lower from the current 5.25% to 5.5% level.
That forecast is predicated on a continued deceleration in inflation growth: The Consumer Price Index for November, announced Tuesday, rose 3.1% from the prior year, down two-thirds from its June 2022 peak. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, was up 3.0% in October (the most recent month reported).
If reduction in inflation has hit a floor, speculation is rampant that the Fed will be reluctant to ease more. The Fed wants to see the PCE reach 2%. The index, however, has been in a narrow band near 3% since June, and some wonder whether it can drop that last percentage point any time soon.
This week’s CPI data showed a big rise for shelter costs, up 6.5%. More broadly, services (absent the volatile energy sector) rose 5.5%, and 0.5% month-over-month in November. As a Bank of America Securities note put it, “Core services inflation remains sticky at 0.5% m/m while core goods prices fell for a sixth consecutive month.”
In the bank’s view, the inflation report “keeps the Fed in ‘wait and see’ mode especially with services inflation remaining sticky-high.”
The current trend, with inflation stalling at a seeming floor of 3%, is discouraging to market observers. “Although inflation continues to ease, the Fed will still not declare total victory as the stubborn, so-called ‘sticky’ inflation is untangling at a slower than expected pace,” warned Quincy Krosby, chief global strategist for LPL Financial.
The situation does not appear to be changing in the near term, at least according to Carl Riccadonna, U.S. chief economist at Bloomberg Economics: “We think November’s pace of core inflation is likely to prevail over the next few months, translating to core PCE inflation running closer to 3% annualized.”
Failing to act when inflation began climbing in 2022 weighs on the Fed, as Chairman Jerome Powell has admitted. So, observed Bill Adams, chief economist for Comerica, “the Fed would rather risk keeping rates high for longer than necessary than risk cutting too early and allowing inflation to rebound.”
Tags: Bank of America, Bloomberg Economics, Comerica, Consumer Price Index, energy, Federal Reserve, Inflation, LPL Financial, PCE, services, shelter, sticky inflation