US Fed February Big Step or Baby Step... Focus on Consumer Prices

[Asia Economy New York=Special Correspondent Joselgina] Big step (0.5% point increase in the base interest rate) or baby step (0.25% point increase in the base interest rate).

As expectations for inflation easing spread ahead of the release of the US Consumer Price Index (CPI), the possibility of the Federal Reserve (Fed), the central bank, adjusting its pace further is gaining more support. If the slowdown trend is confirmed once again, there is speculation that the Fed may reduce the rate hike to 0.25% points at the regular Federal Open Market Committee (FOMC) meeting in February.

[Image source=Reuters Yonhap News]

On the 11th (local time), Susan Collins, President of the Boston Federal Reserve Bank, expressed support for a 0.25% point increase at the February FOMC in an interview with the New York Times (NYT).

President Collins said, "A 0.25% point or 0.5% point increase is reasonable," adding, "(I) am leaning toward a 0.25% point increase at this stage, but it depends on the data." This statement supports the possibility of the Fed adjusting its pace further in February following December last year. She mentioned, "By raising rates slowly, we have more time to evaluate data before making decisions," and "A smaller change provides more flexibility."

Recently, within the Fed, remarks suggesting additional pace adjustments ahead of the February FOMC have been coming one after another. The day before, Raphael Bostic, President of the Atlanta Federal Reserve Bank, and Mary Daly, President of the San Francisco Federal Reserve Bank, also left open the possibility of a baby step, assuming a slowdown in CPI and other indicators. Previously, after four consecutive giant steps (0.75% point increases in the base interest rate), the Fed slowed the tightening pace to big steps starting in December last year.

The market is also leaning toward a baby step. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on this day reflects more than a 77% chance of a 0.25% point increase in February. This is higher than the 69% level a week ago.

Accordingly, the key will be the December CPI to be released on the 12th. Currently, Wall Street investors expect the December CPI to rise about 6.5-6.6% year-on-year, slowing down from 7.1% in the previous month. If the CPI, which exceeded 9% in June last year, slows to the 6% range, it could be grounds for the Fed to judge that its tightening policy has been effective. On the other hand, HSBC, BNP Paribas, and others maintained their forecasts that the Fed will continue with big steps in February.

These Fed officials left room for additional pace adjustments but drew a line against market expectations of a pivot (direction change). President Collins, who expects rates to exceed 5% through three consecutive 0.25% point increases in February, March, and May, said, "It is reasonable to maintain that level until the end of 2023," ruling out the possibility of rate cuts within the year. Presidents Bostic and Daly also predicted that rates would rise above 5% and remain at that level for a long time.

Meanwhile, speeches by Patrick Harker, President of the Philadelphia Federal Reserve Bank, James Bullard, President of the St. Louis Federal Reserve Bank, and Thomas Barkin, President of the Richmond Federal Reserve Bank, are scheduled for the following day.