The big news last week was the Fed’s more hawkish than expected announcements about a higher target for Fed funds rates in 2023 after November CPI core inflation data showed that inflation is continuing to decline.
- The core CPI inflation index (all items less food and energy) rose 0.2 percent in November, its smallest increase since August 2021. Including food and energy, the November CPI rose 0.1%, after increasing 0.4% in October.
- Core “goods” prices fell by 0.5%, and core “services” prices rose 0.4% even before the sharp decline in rent inflation which private-sector data indicate is coming.
- The core November PCE deflator (Fed’s preferred measure of inflation) due out this Friday is expected to show a 0.2% monthly increase and +4.6% over the last 12 months.
The Fed didn’t disappoint our expectation of a “hawkish” push-back to a positive market reaction to declining inflation data, and in fact increased its December Summary of Economic Projections (“SEP”), which sent markets down the balance of the week.
- Chair Powell said that he saw multiple more rate hikes to come. The FOMC member December SEP, compared to their September SEP, shows:
- Higher GDP growth in 2022, but lower growth in 2023
- Lower Unemployment rate in 2022 but higher unemployment in 2023 & 2024
- Higher headline and core PCE inflation in 2022, 2023 & 2024
- Higher Fed funds rates in 2023 & 2024
- It is not clear whether FOMC members truly believe their higher inflation and interest rate forecasts or if they are being overly hawkish to prevent further market exuberance.
- Either way, this hawkish “forward guidance” will weaken the economy and reduce the likelihood of the soft-landing markets have been hoping for.
- If the FOMC remains “data driven”, there is still a chance that more rapidly declining inflation in December and January will let the Fed pause after is February 1, 2023 ¼% rate increase, thereby being a catalyst to help U.S. stocks to break above the SPY 4100 resistance.
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