Chicago Fed President: U.S. Inflation Deceleration is a Persistent Trend, Not a Transient Anomaly
Chicago Federal Reserve President Austan Goolsbee recently emphasized that the recent slowdown in U.S. inflation is not merely a temporary blip but indeed represents a sustained trend. During an interview with the Financial Times, the influential Fed official dismissed the notion that efforts to steer inflation back toward the central bank’s 2% target were slowing down.
Goolsbee stated, “There is a substantial body of evidence indicating that inflation is exhibiting a downward trend compared to previous levels, which aligns with our objectives. It is irrefutable that this trend has taken root, and it was not a momentary fluctuation. …we must remain vigilant to ensure its continuity.”
Furthermore, the current economic environment places the central bank in a situation where, even if they maintain the current fund rate, inflation will likely continue to moderate, as noted by Mike Fratantoni, Chief Economist of the Mortgage Bankers Association (MBA). He pointed out, “The Fed is already at a juncture where if they choose to maintain the status quo, and inflation remains stable or diminishes further, they will effectively decelerate the pace of economic expansion. It’s worth noting that the cumulative effects of the previously implemented rate hikes have not fully materialized yet.”
This perspective raises important questions regarding the potential ramifications of persistent inflation deceleration and its implications for the central bank’s monetary policies in the near future. It is essential to closely monitor these developments in light of the evolving economic landscape.
In September, there was a monthly inflation increase of 0.4%, with housing costs emerging as the primary driver of the overall price surge. Goolsbee acknowledged that the sudden reversal in rental and other housing-related inflation, following several months of decline, represented a “negative surprise” and warranted a “cautious approach.”
A voting member of the Federal Open Market Committee (FOMC), Goolsbee expressed confidence in the Fed’s ability to rein in inflation without causing economic hardships. However, he voiced concerns about the potential for further increases in oil prices, particularly in the context of escalating tensions in the Middle East. Goolsbee remarked, “Historically, oil price shocks and external economic disruptions have derailed economic soft landings, even when they were less complex than the current situation.”
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A number of experts have suggested that the Federal Reserve is approaching its 2% inflation target. Fratantoni contended that the Fed might achieve this target as early as 2025, signifying a potential end to its restrictive monetary policy. In his assessment, the likelihood of a rate hike by the central bank in November was viewed as low, and there was a diminished probability of any rate increase in December.
Fratantoni also highlighted recent developments, pointing to the 10-year Treasury’s recent peak at 4.8% and suggesting that it is poised for a shift in direction. He anticipates that this key benchmark will dip below 4% by the conclusion of 2023. Additionally, Fratantoni projected a declining trend in mortgage rates for the years 2024 and 2025.
Summarizing the situation, Fratantoni remarked, “We are currently at the nadir of this economic cycle. Our perspective is that the Fed’s policy adjustments are complete, and they are likely to maintain the federal funds rate within the range of 5.25% to 5.5%. Although their projections in September implied the possibility of one more rate hike, recent remarks by some of the more hawkish members suggest that the substantial changes in the long end of the yield curve are effectively achieving the central bank’s goals, making any further immediate rate hike unnecessary.”
Philadelphia Federal Reserve President Patrick Harker delivered a speech at the MBA Annual Conference in Philadelphia on the preceding Monday. Harker stated that interest rates could remain unaltered if current economic and financial conditions persist. He noted, “To date, economic and financial conditions are progressing as anticipated, perhaps even slightly better.” Harker elucidated that the central bank’s endeavors over the past 18 months to mitigate inflation have contributed to the current housing finance landscape, resulting in a discernible trend towards disinflation and the gradual integration of the Fed’s interest rate policy into the broader economy.
Harker expressed the expectation of a continued decline in inflation, with a projection that it will dip below 3% in 2024, subsequently stabilizing at the desired 2% target. However, the assessment of disinflation trends may encounter challenges in the future. As an illustration, the Consumer Price Index (CPI) report for September showed a modest upside, primarily influenced by energy and housing.
During its September meeting, the Federal Reserve opted to maintain the federal funds rate at a 22-year high, ranging from 5.25% to 5.5%. The released minutes from this meeting suggest a cautious approach by the Fed when deliberating potential rate hikes in the future.
In recent months, mortgage rates have been significantly influenced by shifts in fiscal policy within the federal government. With diminished revenues and increased spending, these fiscal changes are having a pronounced impact on mortgage rates during the autumn season. Notably, the deficit has surged by approximately 60% in comparison to figures from the previous year, while the government’s interest expenditures have risen by approximately 30% in the same period.
As an illustrative point of reference, Mike Fratantoni emphasized that interest payments now approach $700 billion, which is in close proximity to the annual budget allocation for defense, amounting to approximately $800 billion. These substantial numbers are resonating in the financial markets, reflecting the challenges faced by the government in reaching budgetary decisions and addressing fiscal concerns.
Furthermore, the looming possibility of another debt ceiling standoff poses a significant threat. Such an event could potentially limit the government’s capacity to meet its debt obligations, consequently rendering the nation more susceptible to credit downgrades and the specter of default.
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