Federal Reserve Board Chairman Jerome Powell holds a news conference following the announcement that the Federal Reserve raised interest rates by half a percentage point, at the Federal Reserve Building in Washington, U.S., December 14, 2022.
Evelyn Hockstein | Reuters
There is more evidence out Friday morning that the rate of inflation continues to slow.
A closely watched measure of inflation, the full and core personal consumption expenditure deflator (PCE), within the personal income and spending data, advanced at their slowest annual rate since the fall of 2021.
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That should be good news for the Federal Reserve, as it watches the so-called core PCE, which excludes food and energy, quite closely.
The data should keep the Fed from raising rates by anything more than a quarter point at its next meeting on Jan. 31-Feb. 1.
Many central banks around the world are beginning to dial back on their own rate hikes of late.
The Bank of Canada recently signaled a pause in its rate-hiking cycle. Meanwhile central banks in Brazil, Poland, the Czech Republic and Indonesia have either halted their rate hikes or indicated that they would soon do so.
The Bank of England, the European Central Bank and the Royal Bank of Australia have pledged to continue raising rates owing to persistent inflation that is, at least in part, far stickier than what we see here in the U.S.
More signals for a Fed pause
The signals for a coming Fed pause are growing as the dollar has tumbled 11% from its most recent peak, inflation “breakevens,” a bond market measure of inflation expectations, remain anchored at about 2.25% and wage inflation has slowed noticeably in recent months.
While it’s true that the Fed is likely to raise rates three more times by late spring – by a total of another 0.75 percentage point to around 5% – the hard work is probably done, both at home and in many places abroad.
A warm winter in Europe and North America averted a major price spike in energy costs.
Indeed, natural gas and heating oil prices have plunged recently to levels not seen since the pandemic.
Crude and gasoline prices have bounced, owing to the expected increase in demand from China as it exits its Covid-induced lockdowns. So-called revenge travel has driven up demand for oil and gas. But that could prove “transitory” just as consumers here at home are beginning to put the brakes on spending.
A pattern emerges
Central bankers are approaching this rate-hiking cycle in a manner similar to the way in which companies account for their inventories: first in, first out.
That’s a pattern emerging among central banks who hiked first and are now more likely to stop raising rates in the relatively near future.
Reviewing recent data, inflation rates in the consumer income and spending data, along with Thursday’s gross domestic product report, are falling more quickly than the Fed recently forecast. That’s true in some overseas economies, as well.
Add to that a marked deceleration in consumer spending, also seen in both reports, and it’s clear the economy will slow appreciably from the steady rate of growth we had seen across 2022.
Central banks’ realization
Many continue to make the case that the labor market needs to break before the Fed is finished tightening.
But, as I wrote recently, the strong labor market has much more to do with a shrinking pool of labor than it does with an overheating economy.
Indeed, there is no wage/price spiral evident in the economy today.
Further, interest rates are now comfortably above the current rate of inflation, ensuring that the cost of money will continue to restrain growth and inflation.
While credit conditions have eased, some say too much for the Fed’s liking, real interest rates remain positive and real estate remains unaffordable for many. Even car prices remain elevated, locking buyers out of the market and likely putting downside pressure on economic growth going forward.
Global central banks are slowly and grudgingly coming to this same conclusion as well.
Back in the day, Fed watchers kept a close eye on major central banks, such as the Bank of England and the Banks of Canada and Australia, as they tended to lead the Fed’s rate hiking and rate-cutting cycles.
Today, it may be emerging market central banks that call the tune.
In that regard, they are sending a signal that the inflation threat may have passed.
Historically, emerging market nations are more troubled by inflation than developed economies tend to be.
If they’re beginning to say the threat has passed, maybe the Fed should be listening.
— Ron Insana is a CNBC contributor and a senior advisor at Schroders.
