Is the Fed Winning the War on Inflation?
The inflation outlook is improving in the first half of 2023, helped by favorable base effects and falling asset prices. The analysis by Sonia Meskin, Head of US Macro, BNY Mellon Investment Management
As widely expected, the Federal Reserve Open Market Committee (FOMC) raised its federal funds target range by 25 basis points (bps) to 4.50-4.75% yesterday.
The tone of the statement was in line with expectations, with the FOMC indicating that peak rates are on the horizon. The markets interpreted the statement slightly aggressive, however the subsequent press conference was judged to be more dovish in tone.
WHAT POWELL (FED) SAID
In the press conference, President Powell underlined the FOMC's focus on inflationary risks and the link between inflation and the labor market.
However, the terminal rate may not be inextricably fixed at 5%, even though the December Summary of Economic Projections (SEP) showed a FOMC central expectation at around 5-5.125%. Furthermore, Powell did not dismiss the recent easing in financial conditions, contrary to our expectations.
INFLATION OUTLOOK IS IMPROVING
The inflation outlook is improving in the first half of 2023, helped by favorable base effects and falling asset prices.
Based on market prices, investors seem optimistic that most of the inflationary momentum in the US has been short-lived and is largely behind us. Both headline and core inflation are expected to slow this year, possibly bringing central data to 2%, much closer to the Fed's inflation target than we have been since COVID.
THE RISKS
Why, then, do we believe core inflation risks remain to the upside relative to market prices?
First, because labor market conditions remain tight, with wage growth much higher than levels that would be consistent with core inflation of 2%; furthermore, inflationary trends in the services sector tend to correlate with wage inflation.
Chairman Powell rightly noted that inflation expectations look reasonably sound, but he didn't elaborate on the subject. We believe the Fed can score a point in the fight against inflation in the first half of 2023, but the game may not be over yet."
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/fed-guerra-inflazione/ on Sat, 04 Feb 2023 06:19:52 +0000.