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Another reason for the Fed to hike: US CPI inflation rises from 0.2% to 0.5% - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 16, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Rob Carnell, Research Analyst at ING, suggests that the last possible piece of data that could have undermined expectations for a 25bp rate hike at the Dec 16 FOMC meeting, has if anything, reinforced the need for a small increase in rates.

    Key Quotes

    “November CPI was flat on the month – but that was still sufficient, given helpful base effects, to push the annual inflation rate from 0.2%YoY to 0.5%YoY. Much more of this seems likely in coming months, even with oil’s recent price weakness. So as we move through January and into February, we look for headline inflation to rapidly begin to converge on core inflation, now up to 2.0%YoY (up from 1.9% in October).”

    “We suspect that the Fed will try to resist any pressure this puts on them to respond more aggressively with policy rates than the market currently expects. They will be wary that such actions will likely push the USD meaningfully higher, and weaken an already soft manufacturing sector. As a result, the Fed are likely to tolerate some higher headline and core inflation, as well as higher wages, which we believe will continue to push higher into a 2.5-3.0% range in the early part of 2016.”

    “In doing so, we think the Fed runs the risk that inflation expectations will creep higher, and if they are slow to move policy rates, this pressure is likely to exert itself through the back end of the yield curve, with higher 10Y yields.”
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