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CPI set to influence the Fed’s 2023 plans for inflation

Jeah Lorraine Adams on September 14, 2023

CPI: Consumer inflation is anticipated to have fallen in December compared to November after a problematic 2022 driven by inflation and high costs.

The sudden drop in energy and fuel costs brought on the decline.

However, the yearly rate would likely remain high.

According to Dow Jones, analysts anticipate a monthly decline in the consumer price index of 0.1%.

In the meantime, a 6.5% increase in inflation is presumed.

Despite the reports, the CPI remained below its all-time high of 9.1% in June 2022.

CPI vs Core CPI

The consumer price index measures the average yearly change in prices of consumer goods and services.

Costs associated with food and energy are removed from the core CPI because they alter more frequently than other products.

This limitation is crucial because it may take time to determine the underlying price trend when food and energy expenses vary significantly from month to month or year to year.

Since it is less impacted by short-term changes in food and energy costs, the core CPI is seen as a more reliable inflation index.

It is anticipated to increase by 0.3% in December, reflecting a 5.7% annual growth.

The core CPI increased by 6% annually and 0.2% monthly in November.

Diane Swonk, the chief economist at KPMG, praised the projected drop.

“We welcome it with open arms. It’s good news,” said Swonk.

“It’s great and it helped to fuel consumer spending in the fourth quarter. But it’s still not enough.”

Slowed inflation outlook

The CPI will be released on Thursday, the last batch of data, before the Federal Reserve decides on interest rates on February 1.

The relevance of the inflation rate on the financial markets has increased lately.

Traders predict the CPI to reflect less inflation than analysts expect.

They cited the weaker-than-expected wage increase in the December employment report and other data points that signaled lower inflation expectations.

Stocks rose before the results were made public on Wednesday, which worried Peter Boockvar, the chief investment officer at Bleakley Financial Group.

“The market is looking at it as glass half full. Inflation is rolling over, and the Fed is almost done raising interest rates,” he said.

“I think they remember the last two months when you had numbers that were well below expectations. They’re just assuming that’s going to be the case again.”

The Fed impact

Traders continue to wager on the central bank raising interest rates by a quarter point at its upcoming meeting in the futures market.

Policymakers are expected to raise the fed funds target rate by 0.5 percentage points, according to economists.

20% of the market anticipates a hike of 50 basis points.

State Street Global Advisors’ head economist, Simona Mocuta, saw commotion surrounding a particular data point.

“It’s amazing how much reaction and over a single data point,” she mused. “Clearly, the CPI is very important.”

“In this particular case, it does have fairly direct implications, which are about the size of the next Fed rate hike.”

According to Mocuta, the Fed may be swayed by a lower CPI.

“The market has not priced the full 50. I think the market is right in this case,” she explained.

“The Fed can still contradict the market, but what the market is pricing is the right decision.”

According to Luke Tilley, chief economist at Wilmington Trust, the decline in energy costs and the 12% decline in gasoline prices in December reduced inflation.

The CPI has not reflected a deceased pace, even though the rental market suggests a drop.

“Shelter is the main focus because of the lag,” said Tilley. “Everyone is familiar with the lag that it takes for the data to show up in the CPI.”

“We think there could be a sharper slowdown.”

Nearly 40% of the core CPI comprises housing costs, which are anticipated to increase by 0.6% per month.

Luke Tilley claims that landlords have complained that as the housing market gets worse, it is getting harder for them to boost rent.

“We’re pencilling in slower increases in January and February and March on that shorter leg.”

Focus on services

Economic experts have concentrated on growing service inflation in the CPI since goods inflation is likely to continue shrinking because of the stabilized supply chain.

“The headline monthly changes over the last two, three months overstate the improvement,” said Simona Mocuta.

“We’re going to get the same help from gasoline in the next report. I don’t want to see an acceleration in shelter. I want to see some of the discretionary areas show deceleration.”

“I think right now the focus is very much on the services side.”

The market is now concentrating on the Fed’s capacity to control inflation since it may affect how much further interest rates are hiked.

The economic slowdown brought on by the hike might be the discrepancy between a recession and a soft landing.

“The hope is that basically, we are now in a position where you could envision a soft landing,” said Diane Swonk.

“That requires the Fed to not only stop raising rates but ease up sooner, and that doesn’t seem to be where they’re at.”

“The Fed is hedging a different bet than the markets are. This is where nuance is really hard. You’re in this position where you’re improving,” she continued.

“It’s like a patient is getting better, but they’re not out of the hospital yet.”

Reference:

Inflation is expected to have declined in December, but it may not be enough to stop the Fed

Mortgage rates continue their upward rise for 5 straight weeks

Scarlet Logan on March 20, 2023

…

Mortgage – Despite a new year, the fight against inflation continues as it remains stubbornly unpredictable.

For the fifth consecutive week, mortgage rates inched toward 7%, and the Federal Reserve suggested that rates will continue increasing.

Fixed-rate average

According to Freddie Mac data released on Thursday, the 30-year fixed-rate mortgage hit an average of 6.73% in the week ending March 9.

A week before, the fixed-rate mortgage was lower at 6.65%.

Last year, the 30-year fixed rate was 3.85%.

It peaked at 7.08% in November, but the rates started dropping.

Despite the positive progress, rates started climbing again in February.

In the past month, the fixed-rate mortgage rose half a percentage point.

The robust economic data suggests that the Federal Reserve has more to do in the battle against inflation and will likely continue hiking the benchmark lending rate.

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” noted Sam Khater, a chief economist from Freddie Mac.

“Overall, consumers are spending in sectors that are not interest rate-sensitive, such as travel and dining out.”

“However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.”

The average mortgage rate is based on the mortgage applications Freddie Mac receives from thousands of lenders across the United States.

It only covers borrowers who give a down payment of 20% with excellent credit scores.

Rate hikes confirmed to continue

At the onset of 2023, inflation showed signs of cooling off.

However, substantial employment numbers and a rising Consumer Price Index showed that inflation was still around and remained stubbornly high.

On Tuesday, Federal Reserve Chairman Jerome Powell spoke to Congress, saying the central bank will likely raise interest rates higher than before.

Economist Jiayi Xu of Realtor.com said:

“While last month Fed officials said that a smaller increase in the federal funds rate would help create a soft landing for the economy, Powell’s testimony on Tuesday made it clear that the central bank is prepared to return to a faster pace of rate increases if the incoming February economic indicators remain strong.”

She said the decision suggests that investors weren’t fully prepared as they are anxious about the Federal Reserve’s next actions.

The Fed has another rate-setting meeting on March 21 – March 22, with the possibility of another half-point rate in the cards.

“Uncertainty about how high rates will go and how long they will remain elevated makes it challenging for investors to make well-informed decisions,” said Xu.

“Therefore, it’s crucial to keep a close eye on the latest developments from the Federal Reserve.”

Although the Fed doesn’t set the interest rates borrowers pay on mortgages directly, its actions still influence them.

Mortgage rates tend to track the yield on 10-year US Treasury bonds.

It moves based on anticipation of the Fed’s actions, what it actually does, and how investors react.

When Treasury yields increase, mortgage rates also go up; when they decline, so do mortgage rates.

Housing market

The rising mortgage rates have slowed down the spring selling season.

According to the Mortgage Bankers Association, applications for a mortgage slightly rose last week following three weeks of declines.

As a result, the activity is muted.

Bob Broeksmit, the president and CEO of MBA, said:

“Even with this jump in activity, both purchase and refinance applications remain well below year-ago levels when rates were much lower.”

“The recent increase in mortgage rates, right at the start of the busy spring buying season, could cause prospective buyers to delay decisions until rates moderate.”

According to Fannie Mae’s survey, homebuyer sentiment fell to record lows in February.

Following three months of improvement, sentiment dropped and returned the index closer to its all-time survey low from October.

The most notable drops were associated with job security and home-selling conditions.

“While the current housing market may not look promising for sellers due to factors such as an increasing number of unsold homes, longer time on market, and decelerating price growth driven by high mortgage rates, there are still opportunities to be found,” said Xu.

For example, she noted that recent sales data shows the share of first-time homebuyers is higher than last year.

“As a result, sellers with starter homes may see robust demand and retain some bargaining power.”

Additionally, Xu said the lasting presence of hybrid working models offers more flexibility for homebuyers choosing where to live.

Instead of competing for a home in dense, central areas, buyers will move away from work if they don’t commute to work every day.

“This trend could make homes with easy access to public transportation systems more attractive to home buyers, which, in turn, enhances bargaining power for the sellers,” said Xu.

She also said that sellers who are also buyers could leverage their record-high equity even if they have to adjust expectations to lower asking prices.

The Fed needs freedom to make hard decisions

Alice Blake on January 12, 2023

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The Fed: After prices have risen to levels not seen in decades, the Federal Reserve attempted to control inflation last year.

However, their efforts have run into complications since political meddling has limited the Fed’s authority to make decisions.

Jerome Powell, the chairman of the Fed, recently spoke on the subject.

Remarks

Jerome Powell reiterated on Tuesday that for the central bank to effectively control excessive inflation, it must be free from political pressure.

Even if it leads to politically unfavorable criticism, the Fed Chairman informed Sweden’s Riksbank that stern measures would need to be taken to stabilize prices.

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” said Powell.

“But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

“The absence of direct political control over our decision allows us to take these necessary measures without considering short-term political factors.”

At a meeting to discuss the independence of central banks, the Fed Chair remarked.

There was a question-and-answer period following the comments.

Actions

Jerome Powell’s speech included no references to the course that the policy will take this year.

In 2022, the Federal Reserve raised interest rates a record seven times, for a total increase of 4.25 percentage points.

The increases raise the possibility of more hikes this year.

Opposition

The Federal Reserve frequently makes choices that are harshly criticized.

Public officials’ grievances and critiques are nothing new, but Powell’s Fed has drawn fire from both political parties.

Prices increased under his leadership, which former president Donald Trump condemned.

Democrats like Elizabeth Warren, a progressive senator, have criticized the most recent interest rate hikes.

President Joe Biden has refrained from commenting on the Fed’s actions, stating that it is the central bank’s responsibility to deal with inflation directly.

Jerome Powell stated that political factors had not swayed him in spite of the allegations.

Calls for climate change

During his speech on Tuesday, Powell addressed the lawmakers’ calls to use the Fed’s regulatory authority to fight climate change.

Last year, he received letters from four top Republican House Financial Services Committee members.

The Republicans argued that the Federal Reserve shouldn’t control consumer demand or decide which businesses get more support.

Powell said that the Fed should continue on its current trajectory rather than deviate from pursuing perceived societal benefits that are weakly connected to their legal obligations and goals.

He asserts that the Fed’s request for large banks to evaluate their financial preparedness for climate-related calamities (such as hurricanes and floods) is the closest thing to climate-related activities they should be involved in.

“Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections,” added Powell.

“But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.”

“We are not, and we will not be, a ‘climate policymaker.'”

Climate program

A “scenario analysis” is being solicited with the inclusion of the six biggest banks in the US as part of a pilot program the Fed is launching this year.

An institution’s resilience to significant climatic disasters will be assessed through the analysis.

The test will resemble the so-called stress tests used by the Fed to assess how banks might respond to actual economic downturns.

The following banks are taking part in the exercise:

Bank of America
Citigroup
Goldman Sachs
JPMorgan Chase
Morgan Stanley
Wells Fargo

Independence

Throughout his remarks, Jerome Powell discussed central bank independence and maintained that the American people profited from it.

According to Powell, central banks’ independence empowers them to make difficult decisions.

“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” he added.

Congress set the highest employment and price stability targets for the Fed and its staff to be independent and use its tools to carry out the goals.

“Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence,” said Powell.

References:

The Fed is not a ‘climate-policy maker,’ Powell says

Powell says Fed might have to make unpopular decisions to stabilize prices

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