- Investors are maintaining their expectations that the Fed will cut interest rate hikes in February.
- The easing of inflation fuels a bullish view on a 25bp move, but shelter prices may still look firm to policymakers.
- One analyst said that the market’s movements indicated a receding “iceberg of fear” around inflation.
Analysts say US inflation is broadly easing and reinforce expectations that the Fed will continue to cut interest rate increases, but flat core rates mean there is still a risk that policymakers will remain at their current pace.
after last week December inflation report which showed the annual rate slowing to 6.5% from 7.1% in November, Expectations jumped That the Fed will raise its benchmark interest rate by 25 basis points on February 1, down from last month’s hike of 50 basis points.
But inflation remains above the Fed’s 2% target, and policymakers are closely watching prices, which exclude energy and food. The core rate for December was 0.3% month over month, up from 0.2% in November. Shelter inflation, which monitors costs for renters and homeowners, rose 0.8%. the The Bureau of Labor Statistics said The shelter index was the ‘dominant factor’ that pushed the core index up.
“The CPI report was in line with consensus, but the details paint a picture of the continuing pressures at its core,” Jefferies economists Anita Markowska and Thomas Simmons wrote in a note this week.
“We think so [the CPI] Economists said the report keeps a 50 basis point hike on the table for the upcoming FOMC meeting, although it is by no means a call for high conviction. “No matter how big the next increase is, we expect the FOMC to be 5.1%, the only question is whether we get there in March or May.”
David Russell, vice president of market intelligence at multi-asset trading platform TradeStation, told Insider that he also sees the Fed committing to a half-percentage-point rate hike at the next meeting.
“There is a risk that the Fed will remain hawkish to make sure that inflation is dead and buried,” he said, noting that there was still upward pressure on shelter inflation.
The bigger issue, Russell said, is how far the Fed wants to raise its key rate, which currently stands in a range of 4.25% to 4.5%. The Fed’s latest quarterly forecast suggested central bankers would see the final interest rate at 5.1% this year, while investors expect 5.25%.
Dan Rago, founder and CEO of brokerage, financial and technology services firm Tradier, said the Fed, led by Chairman Jerome Powell, is “very far” from its inflation target. He told Insider he sees a 50 basis point February price move still in effect and expects rates to reach 6% this year.
“I think the Fed will continue to be aggressive about raising interest rates,” he said.
Jamie Dimon, CEO of JPMorgan He also said recently that the key interest rate could go up to 6%.
Willingness to take risks
Even in the face of further rate hikes, both Raju and Russell said, equity investors showed an appetite for risk.
Raju said his company is seeing a pickup in trading volumes, with stocks already surging on hopes that the economy will avoid a hard landing and that the Fed has some sort of handle on inflation now. Labor market data also indicates continued strength in this area of the world’s largest economy.
Bond yields are moving lower VIX move down and dollar The move down, Russell said, suggests that the iceberg of fear we’ve seen in the past year is almost receding. “The market looks and they see a lower inflation scenario… they see we are nearing the end of this aggressive rate hike.”