Natixis expects December Fed rate hike despite easing CPI

In a preview of the report due Tuesday, Hodge said Natixis anticipated no surprises and expected October to mark the start of a run of subdued inflation readings. Because of a government shutdown last year, the year-over-year inflation rate will not be published. If the figures match the forecast, the three-month annualized rate would hold at 3.4%, while the six-month rate would fall to 2.5%.

Hodge attributed the expected slowdown in core CPI mainly to shelter costs reversing, particularly owners’ equivalent rent and lodging away from home. Stabilizing diesel prices could also ease pressure on energy-intensive goods, he said.

An in-line report would be encouraging to a Federal Reserve that has become more hawkish, but Hodge said it would not rule out further tightening. With inflation still sticky and the labor market stable—and potentially strengthening, based on October’s Employment Situation Report—he wrote that another hike would be warranted in December. Natixis then expects an extended pause. Hodge said September’s rate cut had “removed a dose of accommodation,” and volatility in asset markets may have removed another since then.

He added that Natixis sees little inflationary pressure coming from the labor market and expects supply-side price pressures to fade. Financial conditions have moved closer to neutral, while growth faces greater headwinds and financial markets may be more fragile. If disinflation continues as forecast, Hodge said, those factors could make the Fed reluctant to overtighten.