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The soft inflation reading in November has not caused economists to alter their expectations for the Federal Reserve’s meeting that ends Wednesday, but analysts are ripping up their script for what comes next.
“Stick a fork in it, inflation is done,” said Paul Ashworth, chief North America Economist for Capital Economics.
See: U.S. inflation slows again
Economists still think the Fed will hike its benchmark rate by a half percentage point, bringing its benchmark rate to a range of 4.25%- 4.5%. That is slower than the four straight 0.75 percentage point moves seen since June.
Read: What to watch at Wednesday’s Fed meeting
In the wake of the November CPI reading, some economists think the Fed slows to a quarter-point move in February, bringing the target range to 4.5%-4.75%.
Matt Luzzetti, chief U.S. economist at Deutsche Bank, said the Fed wants to slow to a quarter-point move. He said another soft CPI print in December would allow them to do it.
Going at a slower pace will give the Fed a greater chance of avoiding overtightening or raising rates too high, Luzzetti added. Higher rates raise borrowing costs and slow the economy.
Other economists think a quarter-point hike in February will be the last for the cycle.
“Fed Chairman Powell’s tone will be less aggressively hawkish than in November and his more dovish colleagues likely will be emboldened by this report,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“We now think 25 basis points is more likely on Feb. 1 and we think that will be the final hike,” he added.
Ashworth of Capital Economics agreed.
“The 0.2% month-over-month increase in core consumer prices in November provides strong support to our long-held view that mounting disinflation will soon persuade the Fed to move to the side line after one additional 25 basis point hike in early February,” he said.
Kurt Rankin, senior economist at The PNC Financial Services Group, suggested economists were overly dovish.
“Despite the encouraging November CPI result. the Fed’s monetary tightening will remain intact,” with increases at the Fed’s March meeting, Rankin said, in an email to clients.
This raises a significant risk of a recession starting in the second quarter, “but it’s a risk that the Fed is clearly willing to take,” he added.
“Inflationary embers not fully stamped out could cause much greater damage to the U.S. economy than the mild recession we view as likely,” he added.
The yield on the 10-year Treasury note
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dropped sharply to 3.46% after the CPI data was released.
