Fed Remains Hawkish Despite Signs of Cooling Inflation

Economic data released this week and the Fed’s latest policy announcement serve as reminders that even though inflation is headed in the right direction, we’re not there yet. This should be the key takeaway from comments by central bank Chairman Jerome Powell in his post-Fed meeting press conference.

New Data Shows Inflation Pressures Easing as US Import Prices Drop Further

U.S. import prices fell for a fifth straight month in November, pulled down by declining costs for petroleum products and a strong dollar, supporting the view that inflation could continue to moderate in the months ahead.

The report from the Labor Department on Wednesday followed on the heels of news on Tuesday that consumer prices increased less than expected for the second consecutive month in November.

Despite these signs that inflation is easing, Federal Reserve policymakers don’t see it that way, and called for continued aggressive action.

Fed Sees Inflation Risks ‘Weighted to the Upside’

While many investors believe inflation has peaked and will decline in 2023, the Fed is still taking a cautious stance, Jerome said.

“Participants continue to see risks to inflation as weighted to the upside,” Powell said.

The central bank chief also stressed the importance of keeping inflation expectations low.

Powell also said higher services inflation might cause the central bank to continue raising rates.

“There’s an expectation really that the services inflation will not move down so quickly so that we’ll have to stay at it,” Powell said during a press conference. “So we may have to raise rates higher to get to where we want to go and that’s really why we’re writing down those high rates and why we’re expecting that they will have to remain high for a time.”

The Fed’s median projections showed that it will hike rates as high as 5.1% in 2023. The forecast is higher than the 4.6% projected by the Fed in September.

Rate Cuts Unlikely until Fed is ‘Confident’ about Inflation

The Fed’s 50 basis point rate hike was widely expected, but the central bank’s rate projections which showed not rate cuts in 2023, stands in contrast to some market expectations prior to the data release.

Fed Chair Jerome Powell said the central bank would need to be confident in the path of inflation before looking at cutting its benchmark interest rate.

“Historical experience cautions strongly against prematurely loosening policy. I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” Powell said.

More Rate Hikes Coming

Inflation may be showing signs of slowing gradually, but the Fed remains committed to raising rates until policymakers are convinced that it no longer is a problem. However, keeping the upward pressure on interest rates also increases the chances of recession, which may be the topic of discussion when the Fed meets again in February.