"Not Falling as Expected" Fed Tightening Reconfirmed... US CPI in Focus Tonight

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[Asia Economy New York=Special Correspondent Joesulgina] "The pace at which inflation is falling is much slower than expected. The cost of taking too few measures to lower inflation may be greater than the cost of taking too many measures."

The U.S. central bank, the Federal Reserve (Fed), reaffirmed its stance to willingly accept the risk of triggering a recession in order to curb soaring inflation. Attention is focused on the Consumer Price Index (CPI) for September, to be released on the 13th (local time), ahead of the upcoming Federal Open Market Committee (FOMC) regular meeting next month, where a fourth consecutive giant step (0.75 percentage point rate hike) is highly anticipated.

◆September FOMC Minutes Reveal Concerns Over Persistent High Inflation: "Better to Take More Measures Than Too Few"

The September FOMC minutes released by the Fed on the 12th repeatedly confirmed the concerns of FOMC members about the prolonged high inflation despite consecutive high-intensity tightening measures.

Participants agreed that "inflation is unacceptably high and far exceeds the long-term target of 2%," and that a restrictive stance should be maintained for a considerable period. Previously, at the September FOMC regular meeting, the Fed raised the benchmark interest rate to 3.0-3.25% through a third consecutive giant step (0.75 percentage point hike) and presented a median year-end rate of 4.4% via the dot plot. This implies the possibility of an additional 1-1.25 percentage point increase over the remaining two meetings.

Regarding inflation outlook, participants diagnosed increasing upward pressure. Specifically, core inflation remains at a high level, uncertainties surrounding energy prices persist due to the impact of the Ukraine war, wage increases are higher than expected, and supply chain disruptions continue, all cited as pressures.

Accordingly, the explanation is that only by raising interest rates more aggressively at this point can much greater economic pain related to entrenched high inflation be prevented. The minutes stated, "Many participants expressed concern that the cost of taking too few measures to reduce inflation could be greater than the cost of taking too many measures." This is seen as reaffirming the Fed's willingness to tolerate some economic slowdown for price stability.

In particular, participants anticipated that the longer the inflation rise period lasts, the higher the risk that inflation expectations will not be anchored, resulting in much higher costs for price stability. The minutes also noted that historically, early monetary policy shifts have generally led to unfavorable outcomes.

Morgan Stanley's Ellen Zentner, Chief U.S. Economist, said, "At the November 1-2 FOMC, the Fed indicated a 0.75 percentage point rate hike," and added, "Despite the risks of excessive tightening becoming apparent, the Fed reaffirmed a clear commitment to maintain an aggressive tightening path and keep rates elevated for a longer period."

However, some argue that the higher the recession risk becomes, the more likely the Fed's commitment will waver. The minutes also included remarks suggesting a pace adjustment. The minutes stated, "Some participants mentioned that it would be important to fine-tune the pace of additional tightening policies to mitigate risks that could seriously harm the economic outlook amid the currently very uncertain global economic and financial environment." They also pointed out that excessive tightening could significantly restrict aggregate demand more than the Fed expects, potentially causing inflation to fall below target. Following last month's FOMC, global financial markets have been further destabilized by concerns such as UK government bond turmoil.

◆Following Higher-than-Expected PPI, September CPI to Be Released Tomorrow... Is the Inflation Peak Still Far Off?

These minutes drew more attention as they were released amid a series of inflation indicator announcements closely watched by the Fed. Investors are now focusing on the CPI to be announced the next day. Currently, Wall Street estimates that the September CPI will rise 8.1% year-over-year. This is expected to continue the slowing trend from 9.1% in June, 8.5% in July, and 8.3% in August. However, the month-over-year CPI increase is expected to be 0.3%, higher than August's 0.1%.

Particularly noteworthy in the market is the core CPI excluding volatile food and energy prices. Core CPI (year-over-year) declined from 6.5% in March to 5.9% in July but rebounded to 6.3% in August. There is a possibility of further increase this time as well. The current Wall Street forecast is 6.5%.

Experts point to wage increases and housing costs as recent inflation concerns. Especially for housing costs, which account for 42% of the CPI, there is about a six-month lag before it is reflected in the index. This supports the view that high inflation will persist for some time. Diane Swonk, Chief Economist at KPMG, said, "Core inflation will rise further. It has not yet reached its peak," adding, "There are still many shock risks on the supply chain side."

The Producer Price Index (PPI) released that day also confirmed that inflationary pressures persist. The September PPI rose 8.5% year-over-year, exceeding market expectations. The month-over-month increase was 0.4%, also surpassing forecasts.

With inflationary pressures reaffirmed, bets on Fed tightening have increased. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects more than an 82% chance of a 0.75 percentage point rate hike in November. The peak federal funds rate is expected in February next year (4.50-4.75%), with rate cuts anticipated only in December of the same year.

On the same day, Neel Kashkari, President of the Minneapolis Federal Reserve Bank, dismissed the idea that the Fed's policy pivot criteria are low during a speech in Wisconsin. Kashkari said, "If the economy suddenly declines, we can stop what we are doing. If inflation falls very, very quickly, we can pivot whenever necessary," but added, "We are not seeing such signs."

This content was produced with the assistance of AI translation services.