November’s softer-than-expected consumer-price index is being described by traders and financial-market analysts as a “game-changer” that demonstrates inflation is swiftly easing, reducing the likelihood Federal Reserve policy makers will push interest rates above 5% in 2023.
“We were all expecting a softer report, but this is pretty significant and makes people question what the Fed is going to do moving forward,” said John Farawell, head of municipal trading at bond underwriter Roosevelt & Cross in New York. “We had been thinking 50- to 75-basis-point rate hikes, but now know that Wednesday’s move will be 50 and the one after that may be 25 in February,” he said via phone.
Indeed, fed funds futures traders were recalibrating their 2023 rate expectations, most notably around the Fed’s most-likely move in February. They now see a more-than-50% chance that policy makers will hike by only 25 basis points that month, after delivering a 50-basis-point hike on Wednesday — which, together, would take the Fed’s main policy rate target to between 4.5% and 4.75%.
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