Ever since the Federal Reserve began raising interest rates earlier this year the debate on Wall Street has raged over whether it can curb high inflation without tipping the U.S. economy into a recession.
With each successive rate hike, analysts see the pressure rising on Jerome Powell and his colleagues at the central bank.
In the latest challenge, consumer prices rose faster than expected last month, fueling the likelihood of another 75-basis point rate hike at the Fed's next meeting in November.
Despite the growing fear that the Fed has missed its chance to control inflation, some on Wall Street are still hopeful.
For instance, consumers will receive a reprieve from high inflation rates when they fall by half in 2023, predicts Mark Zandi of Moody's Analytics.
The Consumer Price Index increased by another 0.4% in September, another hike that is punishing consumers who have faced sky high inflation rates during 2022.
Core CPI, which does not include either food or energy costs, rose by 0.6% with an increase in services that increased by 0.8% on broad-based price pressures which was led by rapidly rising shelter costs, up 0.7%.
Inflation Relief Tied to Oil
Inflation relief could be on the way for Americans if oil prices remain at their current prices and do not escalate, if supply chain woes continue to abate and prices for cars start to decline, Zandi, chief economist of Moody’s Analytics, told CNBC.
CPI, which tracks consumer price inflation, could fall by half to 4% from 8% year-over-year, he said.
“The real hard part is going to go from 4% back to down to the Fed’s target. And on CPI, the high end of that target is probably 2.5%,” Zandi said on CNBC. “So, that last 150 basis points — 1.5 percentage points — that’s going to take a while because that goes to the inflation for services which goes back to wages and the labor market. That has to cool off, and that’s going to take some time.”
Economists widely agree that the CPI data released on Thursday likely means that the Federal Reserve will hike interest rates by another 0.75% at its Nov. 2 meeting.
Inflation rates will begin to moderate and the central bankers will likely "feel comfortable downshifting" to a 0.50% rate hike by its December meeting, writes Sarah House, senior economist and Michael Pugliese, economist at Wells Fargo Securities.
"That said, 50 bps of tightening would still represent a very rapid pace of monetary policy tightening, and it would reflect the still stubborn inflationary pressures in the economy," House and Pugliese wrote. "Core CPI inflation has registered a 6.0% annualized rate over the past three months, and it will take a lot more than some gradual slowing before the FOMC feels it has this problem firmly under control."
The Federal Reserve's stance on policy tightening is the right strategy for the economy to return to its previous pathway, Zandi said.
Higher prices for services should decline sufficiently to avoid a recession.
“Job growth is starting to throttle back," he said. "And then, the next step is to get wage growth moving south, and I think that’s likely by early next year. That’s critical to getting broader service price inflation moderating and getting inflation back to target."
The Fed could halt its rate increases at the 4.5% or 4.75% level during the winter months.
“Then, I think they stop and they say, ‘hey, look, I’m going to stop here. I’m going to take a look around and see how things play out,’” Zandi said. “If we get into next summer and things are sticking to my script, then we’re done. We just hit the terminal rate. They’ll keep the funds rate there until 2024. But If I’m wrong… and inflation remains more stubborn, then they’ll step on the brakes again and then we'll go into recession."
Europe is Slowing
Slowdowns are occurring globally already with a "dramatic slowdown in Europe," and an increase of "cooling of activity in the U.S., "said Gregory Daco, chief economist at EY Parthenon.
"While US executives aren’t expressing a desire to retrench in terms of capex, or hiring, there is growing concern that the global waves of uncertainty and the financial market stress will eventually affect the U.S. and lead to a more profound contraction than our baseline for a mild recession," he said.
The Federal Reserve’s monetary policy tightening plans remain aggressive, said Kurt Rankin, senior economist for PNC.
"Their data dependency message will require core CPI inflation, especially to ease before any course correction becomes a consideration," he said. "Unfortunately, wage growth in the U.S. economy has already begun to fizzle while inflation has remained stubbornly high. The Fed’s 'demand destruction aims will only serve to weaken workers’ bargaining positions in the labor market as consumer demand is undercut and businesses see less need to hire in response to slowing demand for their goods and services."
