The Federal Reserve is seen slowing the pace of its rate hikes after a government report showed consumer prices rose less than expected last month, an indication that the central bank’s aggressive policy tightening this year has begun to bite.
The Fed has raised rates more sharply this year than at any time since the 1980s to battle high inflation, delivering a fourth straight 75-basis point rate hike last week that brought the policy rate to a 3.75 per cent-4 per cent range. It was near zero in early March.
Futures contracts that settle to the Fed’s benchmark rate now show traders expect that blistering pace of policy tightening to slow next month, pricing in about an 80 per cent chance the Fed will deliver just a half-point rate hike.
The Fed is then seen shifting to quarter-point hikes in January, with the policy rate ultimately peaking in the 4.75 per cent-5 per cent range by March.
Before the report traders had expected the Fed to raise rates above 5 per cent by then The consumer price index, which rose 7.7 per cent in October from a year earlier, is still running far above the Fed’s 2 per cent target. But it was the first time since February that headline inflation was below 8 per cent. Prices rose 0.4 per cent from a month earlier, less than the 0.6 per cent that economists had expected.
One reason for the cooling was a continued easing in goods inflation, and a flattening of services inflation – exactly what some Fed policy-makers have said they need to see before slowing the pace of rate hikes.
“The hikes in interest rates are beginning to bite into the economy and lower inflation as consumers become more frugal,” said Peter Cardillo, chief market economist at Spartan Capital Securities.
After last week’s rate hike, Fed Chair Jerome Powell had signalled the Fed could slow the pace as the central bank took into account the delayed effect that increases in borrowing costs have on the economy.
But he also signalled the Fed may ultimately take interest rates higher to fight what has been stubbornly high inflation, prompting markets to price in rate hikes to the 5 per cent-5.25 per cent range by Spring, if not higher.
Those bets had been largely unwound by Thursday morning, and traders now see the Fed starting to cut rates by September.
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