A member of the Fed’s Board of Governors, Christopher Waller, said yesterday that the latest macro data allows him to feel more comfortable with raising interest rates by only 0.5% in the Fed’s next decision.
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“Ahead of our next meeting, the latest published data allows me to think about lowering the rate of interest rate increases to 0.5%. Even if that happens, we still have to remember that this is a high rate of increases,” he said yesterday in a speech to the Arizona Economic Forum. However, he noted that Fed members will continue to closely monitor the data that will be published by then, especially the labor market and consumer spending (PCE) data.
St. Louis Federal Reserve President James Bullard, however, said today that interest rates “are not yet in an area that might be considered sufficiently restrictive.” Bullard also added that “it appears that the change in monetary policy had only limited effects on observed inflation, but market pricing indicates that inflation is expected to decrease in 2023.” Bullard noted that in his estimation the appropriate interest rate range is 5%-7%, higher than even the unofficial Fed forecasts.
The next decision of the Fed’s Board of Governors will be released on December 14. So far there have been four consecutive 0.75% interest rate hikes (and six hikes in total since March), and markets expect it to rise by 0.5% at the next meeting. Most of the members of the open market committee proposed further increases during the coming months, which would bring the interest on loans to around 5% from the current target range of 3.75%-4%. However, according to Bullard, a rate of 5% can only be used as the lower range, as mentioned.
“At some point we will reach a sufficient cruising level of the interest rate and then we will stop, but it is impossible to know today when and how this will happen. Everything depends on the data that will be published by then,” Waller added.
Ronan Menachem, Mizrahi Tefahot’s Chief Markets Economist, notes in response to the comments that “Fed chief Christopher Waller said yesterday at the economic conference that there are already interesting things about the policy that will be adopted in the future. Bottom line, Walter emphasized, that the smaller increase in the consumer price index for the month of October is a positive sign , which may cause the increase in interest rates to be more measured, but not to stop completely; even after the sharp increases, the interest rate is “barely” restrained; a single index does not indicate a change in direction and it is premature to conclude from it that inflation has started to decrease.”
In my opinion, Menachem writes, “From the point of view of the market, these things and similar statements by other senior Fed officials indicate that the Fed is holding its cards close to its chest and wants to keep all alternatives open. For this reason, and following his emphasis even more strongly that the course of interest rates depends to a large extent on current data (policy “data dependence”) it is likely that: the market’s sensitivity to these data – in any direction – will be high; data that will support further/sharper interest rate increases (higher price indices, or stronger economic/employment data), will have a greater (negative) effect on the market than those that would justify their moderation; market volatility (between days and intraday) will continue to be higher than usual.”
A week ago, the inflation data in the US was published, which was a pleasant surprise. The annual rate in October fell to 7.7%, compared to expectations of 7.9-8%. The good news also came from the core index, which does not include food and energy prices and fell from the 40-year high year which it reached in the previous month. Now, the data points to an annual core inflation rate of 6.3%, less than the expected 6.5%.
Looking into the price index, it is evident that the biggest impact on it was fuel prices, which jumped by 19.8% compared to last month, and the rent also continued to climb (0.7%), but at the same time there were noticeable price drops in the used car market, in the prices of flights, health services, Clothing and natural gas prices.