After four straight rises of three-quarters of a point, the Federal Reserve is expected to boost its benchmark rate by 0.5 percentage points. Inflation dropped to 7.1% in November, its lowest level since the end of the previous year, prompting the anticipated action.
The annual increase in consumer prices compared to 7.7% in October and to a 41-year high of 9.1% in June, when rising demand and supply constraints due to the pandemic clashed. The data strengthened the prediction that the Federal Reserve would decrease the rate at which it has been increasing interest rates to curb inflation.
In fact, despite indications of decelerating inflation, interest rates remain elevated. The market is anticipating that the Federal Reserve would lower the pace of its recent rate hikes from 75 to 50 basis points, assuming inflation is experiencing little respite.
While today’s data is unlikely to influence the Fed’s rate decision tomorrow, the U.S. core and headline inflation readings will likely set the tone for the central bank and, by extension, the future year, according to Caxton currency analyst David Stritch.
“Today’s U.S. CPI data will give us an idea of how the market pricing for the Fed’s terminal rate will clash with the dot plot projections,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank. “That will come out tomorrow and will, in all cases, hammer any potentially optimistic market sentiment.”