CPI slows, the Fed slows its pace

is this a pivot?

The Fed announced today that they will increase the Fed Funds Rate by 50 basis points. The announcement can be read here. There wasn’t anything new here. The Fed announced that they continue to see a tight labor market and are determined “to return inflation to 2 percent over time”.

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”

The CPI coming in cooler than expected certainly helped this decision but I feel that 50bps at the December meeting has been priced in since the last meeting. I won’t say that the Fed is winning here. Any observation of the CPI shows that we are closer to the highs than the “2 percent objective”.

The headline figure came in at 7.1% year-over-year which was lower than the 7.7% in the previous month and the 7.3% consensus estimate. This fueled a big jump in the market on Tuesday. This is all quite strange to me because this time last year we were seeing inflation at 7.0% and there was a lot of doom and gloom in the air. Now, one year later and everyone is thinking 7.1% means good times are ahead.

The bigger news from the Fed meeting was their economic projections (which are found here).

There are a couple things here that I found fascinating;

1. GDP growth expectations have been revised down for ‘23 in a big way. We went from the Fed-heads thinking we’d see 1.2% to 0.5%. Stagnant growth is going to be a theme moving forward.

2. The Fed funds peaks at 5.1 in ‘23. I believe that this is higher than most expect. It also means we get (at a minimum) two more rate hikes in ‘23.

Something to keep in mind when viewing these projections is that they are simply opinions. The people at the Fed have no better or more precise track record than others who make projections.

Now that the Fed is out of the way, traders are going to pivot towards the Santa Rally. Last year, the market rallied to the all-time high on December 27th. Since then, it has been downhill. Not every year has a Santa Rally but that hasn’t stopped Forbes from putting out an article stating that there is a 77.9% chance of one. Powell may have a thing or two to say about that. “Merry Christmas you filthy animal” certainly comes to mind.