Given the EHI fluctuates from meeting-to-meeting, it is informative to observe its broader trends. A notable relationship is that the EHI for the Fed has a 70% correlation with 12-month core PCE inflation.1 It is therefore unsurprising that the decline in the EHI since July 2022 has been associated with a fall in core PCE inflation.
That the EHI for the Fed rose to 59 in November, and remained above its long-term median level of 44, highlights an important point.2 Rates have likely peaked in the US, but while inflation remains significantly above its 2% target, the Fed is likely to continue to talk tough.
The same is true for the European Central Bank (ECB). The minutes from its October meeting also showed an increase in hawkishness according to the EHI, which rose from 89 to 99 (see Chart 2). The inclusion of the statement “It was deemed important for the Governing Council to avoid an unwarranted loosening of financial conditions” highlighted that the central bank was comfortable with markets expecting rates to stay higher for longer while inflation is above the 2% target.3