3 Experts On What 7.1% CPI Print Means For The Federal Reserve — Is It Too Early To 'Downshift' Or Will The Fed Jumpstart A Market Rally?

Zinger Key Points
  • Economists are anticipating a 0.5% rate hike from the Federal Reserve on Wednesday. The Fed's next move in January isn't as clear.
  • "Inflation should be much less of a problem for the U.S. economy in 2023," one economist says.

The Labor Department on Tuesday reported a 7.1% year-over-year increase in the November consumer price index. The SPDR S&P 500 SPY soared on the release before pulling back as investors fixate on the Federal Reserve's next move

What Happened: The headline CPI increased 7.1% last month, down from 7.7% in October, according to data from the U.S. Bureau of Labor Statistics.

The November CPI reading came in below average economist estimates of 7.3%, according to Benzinga Pro. On a month-over-month basis, CPI was up 0.1% versus average economist estimates for a 0.3% jump.

Core inflation, which excludes volatile food and energy prices, was up 6% in November, below average economist estimates for a 6.1% gain.

Check This Out: Inflation Slows Significantly In November, Sending Stocks Higher: What You Need To Know

3 Experts On Fed Implications: Jeffrey Roach, chief economist for LPL Financial, is anticipating a "downshift" from the Fed following Tuesday's CPI print. 

"We expect the Fed to increase the fed funds rate by 0.50% at the upcoming meeting," Roach said. 

Most are anticipating the Fed to opt for a smaller 0.5% rate increase following an aggressive series of four consecutive 0.75% rate hikes. More importantly, people should be paying close attention to the central bank's expected path of rate hikes moving forward, Roach said.

Bill Adams, chief economist for Comerica Bank, expressed a similar response to the print. He noted the slowdown in inflation broadened in November, encompassing a wider range of goods and services.

Adams took his assessment one step further than Roach and offered some insight as to when the Fed might actually go the other way with interest rates. He highlighted rising wages as a potential focal point for the Fed.

"The Fed will want to see wage growth slow to be more confident that inflation is also slowing before they consider reducing interest rates," Adams said, noting that it's hard to see wage growth staying on its current trajectory throughout 2023.

Comerica expects inflation to cool to under 5% on a year-over-year basis by the spring of 2023. Adams expects a 0.5% rate hike at Wednesday's meeting followed by a 0.25% hike in the subsequent meeting. At that point, the Fed might be able to pause, he said.

"If inflation continues to fall, the Fed will probably be able to start reducing interest rates in the fall of 2023. But that process is expected to be very gradual since the Fed doesn't want to be caught offsides by a too rapid reacceleration of the economy fueling a rebound of inflation," Adams said.

"Inflation should be much less of a problem for the U.S. economy in 2023."

Not So Fast! Joseph Brusuelas, principal & chief economist at RSM US, said it's "simply too early" to know. 

Brusuelas expects the Fed to raise rates by 0.5% on Wednesday followed by another 0.5% hike in January. 

"While the easing in commodities, energy and goods costs are all positive and encouraging and will introduce discussion around a 25-basis point hike at the January meeting, the trajectory of the shelter costs and the likely direction of wage costs ... in our estimation implies another 50-basis point hike in January is warranted," Brusuelas said.

"It is simply too early in the inflationary cycle to pull back and pause efforts to restore price stability."

SPY Price Action: The SPY was up 1.52% at $405.07 Tuesday afternoon, according to Benzinga Pro.

Photo via Shutterstock. 

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Posted In: Long IdeasNewsEcon #sTop StoriesEconomicsFederal ReserveTrading IdeasBill AdamsInflationInterest RatesJeffrey RoachJoseph Brusuelas
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