Fed likely to break tightening cycle amid slowing inflation

Lowering inflation will allow the Federal Reserve to deliver just a 0.25 percentage point hike in interest rates at its next meeting and finally stop raising borrowing costs before they reach 5%, traders were betting on Thursday. 12).

After the US Department of Labor reported that consumer prices fell in December from November and Philadelphia Fed President Patrick Harker said 25-point rate hikes would now be appropriate, interest rate futures traders Short-term inflation raised bets on a slower and shallower path of monetary policy tightening ahead.

Fed base rate futures now reflect about a 95% probability that the US central bank will raise the target rate range to 4.5% to 4.75% from the current range of between 4.25% and 4. .5%, at its meeting from January 31 to February 1.

The benchmark interest rate is likely to end the current cycle in the 4.75% to 5% range, with the Fed reversing course to cut borrowing costs in the second half of the year, futures suggest.

Last year, most of the Fed’s rate adjustments were in increments of 75 basis points, as policymakers sought to tighten monetary policy quickly to bring inflation down to a 40-year high.

Thursday’s data showed consumer prices rose 6.5% in the 12 months to December, still well above the Fed’s 2% target but the slowest pace in more than a year and a sign that inflation is heading in the right direction, analysts said.

“Disinflation is gaining momentum as we enter 2023, giving the ‘green light’ for the Fed to ease the accelerated pace of monetary policy tightening,” wrote EY Parthenon chief economist Gregory Daco. “We remain of the view that the Fed will only raise the rate twice by 25 basis points in early 2023 and that it will pause its tightening cycle at 4.75-5.00%.”