Market Extra: Why a not-so-swift decline in U.S. inflation would keep financial markets turbulent through 2023

by | Dec 16, 2022 | Stock Market

Of all the likely paths forward for U.S. inflation, there’s one with the most potential to catch many traders and investors wrong-footed throughout 2023. It’s a path of not-so-swiftly decelerating price gains, which raises investors’ hopes of further easing in inflation but disappoints Federal Reserve policy makers counting on a faster return to more-normal levels closer to 2%. Such a scenario is already bearing out now after the past two months’ worth of data — in which the annual inflation rate of the consumer-price index fell to 7.1% in November from 7.7% in October after peaking at 9.1% in June.Just three days ago, traders and analysts were describing November’s softer-than-expected CPI data, released on Tuesday, as a game-changer that suggested price pressures would ease quickly from here. It didn’t take long for investors and traders to realize such progress wasn’t good enough for the central bank, which hiked its main policy rate again on Wednesday, penciled in borrowing costs of above 5% in 2023, and warned that rates will likely be higher for longer.“The market has been leaning against the Fed because it thinks the economy is slowing quite rapidly and policy makers won’t deliver on their promise to take rates higher,” said Gennadiy Goldberg, a senior U.S. rates strategist for TD Securities in New York. TD is deviating from the consensus expectations of markets by forecasting a fed-funds rate target that ultimately ends up at 5.25% to 5.50% by May, above the Fed’s 5.1% median estimate for 2023.  “We’re thinking inflation remains sticky for longer than anticipated,” Goldberg said via phone. “A lot of that has to do with core services inflation, wh …

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