Inflation path uncertain as Fed plans to stay on hold

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Inflation remains tame, and although the consumer price index has ticked up, producer prices surprised to the downside Thursday.

The November Producer Price Index was flat after a 0.4% rise a month earlier, and rose just 1.1% in the past 12 months, the same as in October, the Labor Department reported.

The core rate fell 0.2% in the month after a 0.3% increase in October, and grew 1.3% year-over-year.

Economists polled by IFR Markets expected a 0.2% rise in each of the monthly numbers and a 1.2% rise year-over-year in the headline number and 1.7% increase in the core.

“The path for inflation remains highly uncertain while binary risks around trade remain live,” Morgan Stanley Researchers led by Ellen Zentner said in a note. “The result is a Fed that is hamstrung until a more clear sign on the direction of economic activity emerges.”

Morgan Stanley will watch economic indicators “for signs that downside risks to the outlook increase or abate.” But the Fed will continue its pause through 2020, they said. “On our year-ahead forecasts for inflation, the bar for hiking rates will not be met prior to mid-2021.”

Initial jobless claims soared to 252,000 in the week ended Dec. 7 on a seasonally adjusted basis from 203,000 the week before. Claims hadn’t been at this level since September 2017.

The Thanksgiving holiday the previous week may have skewed the numbers, as the seasonal adjustment may have been off since the holiday fell later than usual in the month.

Economists expected 212,000 claims in the week.

Continued claims fell to 1.667 million in the week ended Nov. 30 from 1.698 million a week earlier.

“Softer PPI and jobless claims data suggest some weakness is creeping into the U.S. economy,” according to Edward Moya, senior market analyst, New York at OANDA. Federal Reserve Board Chair Jerome “Powell’s presser had a dovish tone and the dollar could remain vulnerable if we start to see any momentum come out of Europe,” he added. “The Fed will remain accommodative as the balance sheet will continue to grow as the Fed remains committed to their liquidity operations that have been keeping short-term rates stable.”

While the Fed made it clear that no rate changes are imminent, George Boyan, president of Leumi Investment Services Inc., said, “the question we are left with post this statement and press conference [is] what would be a materially significant event to cause the Fed to act? It is no longer trade uncertainty. Rates move each day in the direction of the trade talks. Positive news, rates rise. Negative news, rates fall. So this leads us to inflation. And it seems the Fed can’t figure out how to spur inflation. Until they figure it out, we will sit here. Low rates, low unemployment and a tight range in rates.”

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