Fed Seen on Track to Quicken Taper After Latest Inflation Print

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The Federal Reserve is likely still on track to announce a faster pace of tapering at its meeting next week after U.S. consumer prices rose at the fastest pace in nearly 40 years. 

The consumer price index in November rose 6.8% from a year earlier and 0.8% from October, according to Labor Department data released Friday. The increase in the CPI reflected broad advances in most categories including gasoline, shelter, food and vehicles.

“It confirms that the Fed is on track to begin hiking rates at some point next year,” Sarah House, senior economist at Wells Fargo & Co., said of the November CPI print. “I think this keeps them on track to see the dots move up pretty notably when we get the forecast next week.”

Officials wrap up their two-day meeting on Wednesday and release a policy statement at 2 p.m. Washington time as well as fresh forecasts for the economy and interest rates. 

When they gathered in September, the 18 policy makers were evenly split on the need to lift rates from zero next year or in 2023. But price pressures since then have mounted and the labor market has continued to heal from the wounds of the pandemic.

Last week, Fed Chair Jerome Powell said that it “now appears that factors pushing inflation upward will linger well into next year,” adding that “it is appropriate, I think, for us to discuss at our next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier.”

The Fed is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November to slow buying by $15 billion per month. Economists say the November CPI reading adds to evidence that the central bank will announce a quickening of that pace at its next meeting, setting it up to raise rates from near zero sooner as well. 

Interest rate futures currently signal around 67 basis points of Fed tightening next year, about 5 basis points less than before the inflation numbers were released.

“We have the first hike in June, we used to have September, we recently moved everything up by three months,” said Jennifer Lee, senior economist at BMO Capital Markets. “I think this report basically puts them on that track.”

The Fed has been under both public and political pressure to address decades-high inflation, but has to balance that with a mandate to ensure maximum employment. The labor market is still some 4 million jobs short of where it was before the pandemic.

While it’s likely the Fed will begin hiking rates next year due to rising inflation, “I don’t think it means that the Fed’s going to be overly aggressive,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics Inc. “Powell wants a long economic expansion, and to do that the Fed needs to be somewhat patient.”

Earlier this year, economists, including those at the Fed, didn’t expect rate hikes to occur until late 2022 or 2023. But many have changed that call as pressure on consumer prices continues to rise.

“I think that their plan right now probably is three rate hikes next year, four rate hikes in 2023,” David Kelly, JPMorgan Asset Management chief global strategist, said in an interview on Bloomberg Television. 

“That means that at the end of 2023 the federal funds rate would be between 1.75 and 2% which is still below inflation. So all we’re saying is the Fed’s getting less dovish here. There are no hawks in the environment at all.”

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