November’s inflation report brought some welcome news related to inflation, with a slightly milder than expected rise in headline CPI month-over-month of 0.1%, and Core CPI of 0.2%. This continues a four-month trend of steady or improving monthly reports and, we believe, makes it very likely that the Fed will limit the next rate hike to 0.5%.

Both stock and bond markets are reacting ecstatically; this reaction seems overzealous. Four months is a very short time frame for the Fed to draw the conclusion that the inflation problem is resolved.  In addition, the substantial amount of monetary tightening already in place raises the risks of recession. The decline in shelter prices that contributed to this lower inflation reading is reflective of the slowing demand for houses and for rentals in the face of rising interest rates.  

Based on our current work, we believe monetary policy will remain restrictive for some time.