Hike, Pause, Pivot Or Cut? 4 Experts On The Fed's Next Interest Rate Move As CPI Data Shows Inflation 'Weakening'

The Labor Department on Thursday reported a 6.5% year-over-year increase in December's consumer price index (CPI).

Meanwhile, the SPDR S&P 500 SPY is volatile as investors shift their attention to how the Federal Reserve will respond. Four experts laid out expectations following the print.

What Happened: The headline CPI was up 6.5% last month, down from 7.1% in November, according to data from the U.S. Bureau of Labor Statistics. The December CPI reading was in line with average economist estimates.

See Also: Edward Snowden Says 'We're All Going To Be Billionaires,' But...

Core inflation, which excludes volatile food and energy prices, was up 5.7% in December — also in line with average economist estimates.

Four Experts Assess Fed's Next Move

Joseph Brusuelas, principal & chief economist at RSM US, believes a pause from the Fed is a "distinct possibility" given Thursday's improving inflation data.

The data implies that conditions are moving in the direction where the central bank can consider further moderation in the pace of rate hikes, he said.

Brusuelas is turning his attention to the fourth-quarter Employment Cost Index Report, which is set to be released a day before the Fed's next decision on rates.

"Should that report also reflect an easing in wage pressures then conditions will be ripe for a reduction in the pace of rate hikes and set the stage for a potential pause in the Fed’s efforts to restore price stability," Brusuelas said.

See Also: Fed Chair Powell Defends Central Bank Independence While In Sweden

Thomas Hayes, chairman and managing member at Great Hill Capital, agreed that a pause is in the cards, but he took it one step further than Brusuelas, calling a potential pause "the prudent move."

"The bond market is telling you the Fed has already gone too far with hiking and the data now confirms it," Hayes said.

"The prudent move will be to act in a data dependent manner and pause in coming meetings versus overcompensating for their errors in 2022."

Bill Adams, chief economist for Comerica Bank, also anticipates the Fed will pause in its coming meetings. Furthermore, he expects a pivot later this year.

"Inflation should continue to slow in 2023, allowing the Fed to pause rate hikes this spring and begin to gradually cut in the fall," Adams said.

The economy was weakening near the end of 2022 and said a mild recession is likely sometime this year, he noted.

Jeffrey Roach, chief economist for LPL Financial, made the boldest call of the group following the CPI print.

"The weakening trend of inflation should convince the Fed to further downshift the pace of rate hikes in the upcoming meeting," Roach said.

After constraining markets with four consecutive 0.75% rate hikes, the central bank opted for a less aggressive 0.5% hike at its last meeting. Roach expects the Fed to opt for a 0.25% rate hike at its next meeting, which kicks off on Jan. 31.

In order for the Fed to begin cutting rates, the labor market must "significantly cool," he said, adding LPL Financial's base case is that the economy will slow enough for the central bank to consider cutting "sometime in the second half of this year."

Related Link: Fed Officials Say Inflation Data Release To Help Decide On Pace Of Rate Hikes

SPY Price Action: The SPY initially fell on the release, before staging a quick reversal. It was up 0.16% at $396.10 at the time of writing, according to Benzinga Pro.

Photo: airpix from Flickr.