Fed rate cut euphoria rides wave of retreating inflation
By Ann Saphir
(Reuters) -Federal Reserve policymakers are set to start the new year with fresh evidence that their 2022-2023 interest-rate hike campaign put U.S. price pressures firmly in retreat, with data on Friday showing that by some key measures inflation is now at or below their 2% goal.
Traders broke out the champagne after a government report showed the personal consumption expenditures (PCE) price index fell 0.1% in November from October, responding to the first decline on that measure since April 2020 by boosting bets not only that the Fed will begin reducing borrowing costs in March but will continue to cut them throughout the year.
Futures contracts tied to the Fed's policy rate are now pricing in an end-of-year benchmark rate in the 3.75%-4.0% range, 1.5 percentage points below the current level, with a good chance it could go even lower.
Analysts caution that Fed policymakers themselves may not be quite as euphoric, noting that much of the decline in November came from a fall in goods prices that is unlikely to continue, at least at the same pace. Rent inflation is still running high, though it is forecast to recede in coming months.
«The more benign inflation data is certainly something to celebrate, but there is some turbulence ahead in the Q1 inflation readings that I think Fed officials will want to get through before turning the focus squarely to rate cuts,» wrote Inflation Insights' Omair Sharif. «Fed officials will want to see a few reports with softer shelter data to gain confidence that they can move on to rate cuts.»
Last week the Fed kept its policy rate in the 5.25%-5.50% range, and Fed Chair Jerome Powell signaled that with the rate-hike campaign that began in March 2022 likely over,
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