Fed Hike Expected to Be Smaller as Inflation Slows

With house prices falling and inflation slowing, but wage growth accelerating, the Fed will likely make a smaller 0.50 percentage point increase in its policy rate at their last meeting of the year on December 14 following four consecutive hikes of 0.75 percentage points each since June.

The S&P CoreLogic Case-Shiller U.S. National House Price Index (HPI) declined by 0.8% in September, while the Case-Shiller 20-City HPI, covering the 20 largest cities, fell 1.2%. Surprisingly, the Federal Housing Finance Agency (FHFA) HPI rose 0.1%. It usually moves in the same direction as the Case-Shiller—the FHFA is more likely to be revised down than the other data to be revised up.
Personal income rose 0.7% in October, nearly twice the consensus forecast for a 0.4% increase. Personal consumption expenditures matched the consensus with a gain of 0.8%. But the saving rate fell to the second lowest in data going back to the 1950s, a headwind to spending in the holiday season. Total and core Personal Consumption Expenditures Price Indices—the Fed’s preferred measures of inflation—slowed in October in year-ago terms, more evidence inflation has peaked.

Payroll employment rose 263,000 in November, well above market expectations for a 213,000 increase. The unemployment rate was unchanged at 3.7%, but both labor force participation and employment fell on the month in the survey of households. The labor force participation rate is down 0.1 percentage points from October to 62.1% in November after reaching a recovery-to-date high of 62.4% in August; it was over 63% pre-pandemic.

Its recent drop partly reflects the Tripledemic of flu, RSV and Covid keeping people out of work. The disconnect between solid payrolls growth in recent months on the one hand, and weaker household employment on the other hand, also reflects more Americans working side gigs—multiple jobholders are up 60,000 per month over the last half year.

This raises payroll employment, but not employment in the household survey. Average hourly earnings rose 0.6% in November, well above the 0.3% consensus, and were up 5.1% from a year earlier; the three-month moving average of wage growth picked up to the fastest since the turn of the year.

The average workweek dipped by 0.1 hours to 34.4 hours, and aggregate hours worked across the economy were down 0.2% on the month and flat from September.

Both the November ISM Services PMI and the December preliminary release of the University of Michigan’s Consumer Sentiment Indicator will likely be down from the prior month. Continued jobless claims, up to the highest since March in last week’s release, may fall next week due to Thanksgiving-related volatility, but that should be taken with a grain of salt since the statistical procedure for removing seasonal variations is less reliable around holidays. The November producer price index, the month’s first inflation release, will likely show another year-over-year slowdown from June’s multidecade high on slower increases in prices of durable goods, shipping, and diesel.

Bill Adams is senior vice president and chief economist at Comerica. Waran Bhahirethan is a vice president and senior economist at Comerica.