In the latest economic developments, the United States is closely monitoring the rate of inflation, which has been a significant topic of discussion among policymakers and investors alike. A recent report from the Commerce Department has shown that inflation, as measured by the Federal Reserve’s targeted gauge, increased by 2.6% in December compared to the previous year. This figure is slightly above the Fed’s 2% target, as measured by the personal consumption expenditures price index.
Core inflation stays below 2%
One of the key factors that the Federal Reserve considers is core inflation, which excludes the volatile components of food and energy prices. The data reveals that core inflation has been running below 2% on both a three-month and a six-month basis. This indicates that when we strip away the effects of temporary fluctuations in food and energy prices, the underlying trend in inflation remains relatively moderate.
After the release of this inflation report, the financial markets reacted with some speculation. Futures contracts that are tied to the Federal Reserve’s policy rate indicated approximately a 48% chance of a rate cut at the Fed’s March 19-20 meeting, with a more significant probability of a rate cut by the April 30-May 1 meeting, standing at 90%.
It’s important to note that the Federal Reserve has not adjusted its policy rate since July of the previous year when it increased the target range by a quarter-of-a-percentage point to 5.25%-5.5%. At that time, the Fed expressed concerns about inflation but also signaled that it was not entirely convinced that its policy was tight enough to effectively combat inflation. However, since then, inflation has been on a faster decline than anticipated by Fed officials. Despite this, Subadra Rajappa, Head of U.S. Rates Strategy at Société Générale, suggests that the Fed may require more data before confidently considering any easing of its monetary policy. She points out that while the disinflationary trend persists, consumer spending and the job market remain robust, which could argue in favor of the Fed maintaining its current policy stance for a more extended period.
Positive economic indicators
It’s not all about inflation, though. Recent economic data paints a more positive picture. Consumer spending showed a surge at the end of the year, and the U.S. economy grew at a 3.3% annualized rate in the fourth quarter, surpassing economists’ expectations. Additionally, the unemployment rate remained at a low 3.7% in December, only slightly above the level seen when the Fed initiated its rate-hike campaign in March 2022.
As we approach the next Federal Reserve meeting in March, it is widely expected that policymakers will keep the policy rate within its current range. However, there may be changes in the language used in their post-meeting statement. Many economists anticipate that the reference to “additional policy firming” could be removed, reflecting a more cautious approach to future rate hikes.
In conclusion, while inflation remains a topic of concern, the broader economic indicators, such as strong consumer spending and low unemployment, provide some optimism.