Although Federal Reserve (Fed) Chairman Jerome Powell has repeatedly stressed the Fed will “keep at it,” he also noted at the end of September the Fed would soon be approaching the time to slowdown. There are calls from within the Fed that it is now time for the Fed to downshift rate increases as the economy responds to earlier rate hikes [Figure 1].
The statement the Fed will release at the conclusion of the meeting is key for the markets, and even more important for markets is what Powell will say during the following press conference. Always looking ahead, the market will be on alert for any indication of what the Fed may do at the December 13-14 FOMC meeting. The fed funds futures market is increasingly forecasting a 0.50% increase in December.
The Economy Slows But Inflation Follows Too Slowly
A broad range of data releases, from manufacturing and manufacturing input costs, used cars, gasoline prices, housing, rent, household spending, job openings, and money supply indicate that growth is easing and inflation is moderating as higher rates take their toll on the economy.
As odd as it may seem, used car prices were one of the first signs that inflation was beginning to take hold. Prices rose dramatically as a shortage in semiconductor chips and other necessary products for vehicle manufacturing were in short supply due to pandemic-led supply chain challenges. Used car prices have fallen steadily since, reaching near normal levels as the auto industry has ramped up production.
The steady climb in mortgage rates to over 7% for the first time since 2001 has stopped the parabolic rise in housing prices. Prices are now coming down across the country for new and existing homes.
Rent, an important component of the Consumer Price Index (CPI), constitutes 32.8% of the total CPI. It has been slow to register decelerating prices, but the latest industry surveys point to a leveling off of the surge in rents. As soon as this begins to register in the CPI, total core inflation will begin to proceed lower at a steadier pace.
Slower manufacturing activity is evident in a broad range of respected surveys, while input costs in the manufacturing process are now turning lower.
Though they’ve inched higher this month, gasoline prices have pulled back substantially from their peak at the beginning of the summer. This has helped anchor consumer perceptions of inflationary trends over one to three-year periods. The Fed has more work to do to break the back of inflation, but clearly inflation is past its peak [Figure 2].
