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Here's a Big Reason the Fed May Stay Aggressive on Its Next Rate Move

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  • Investors are locked into expectations that the Fed will ease its interest rate hike in February.
  • Easing inflation is fueling an upbeat view of a 25 basis point move, but shelter prices could still look sticky to policymakers.
  • Market movements suggest the “iceberg of fear” around inflation is receding, one analyst says.

US inflation is largely easing and bolstering expectations that the Federal Reserve will continue to ease interest rate hikes, but sticky core prices mean there is still a risk that policymakers will maintain their current pace, they say. analysts.

After last week’s December inflation report, which showed the annual rate slowed to 6.5% from 7.1% in November, expectations have risen for the Fed to raise its benchmark interest rate by 25 basis points in 1st of February, below last month’s 50 basis points. walking.

But inflation remains above the Fed’s 2% target, and policymakers are eyeing prices that exclude energy and food. The basic rate in December was 0.3% in the monthly comparison, compared to 0.2% in November. Housing inflation, which tracks costs for renters and landlords, rose 0.8%. The Bureau of Labor Statistics said the shelter index was the “dominant factor” that pushed up the main index.

“The CPI report was in line with consensus, but the details paint a picture of lingering pressures in the core,” Jefferies economists Aneta Markowska and Thomas Simons wrote in a note this week.

“We think [the CPI] The report keeps a 50 basis point increase on the table for the next FOMC meeting, although it is by no means a call for high conviction,” the economists said. “Regardless of the size of the next increase, we expect the FOMC to reach 5.1%, the only question is whether we’ll 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 potential in the Fed holding a half percentage point rate hike at the next meeting.

“There is a risk that the Fed remains hawkish to ensure they really have inflation dead and buried,” he said, noting that there is still upward pressure on shelter inflation.

Russell said the bigger question is how far the Fed wants to raise its base rate, which is currently in the 4.25% to 4.5% range. Recent Fed quarterly projections have suggested that central bankers see the terminal rate at 5.1% this year, while investors anticipate 5.25%.

The Fed, led by Chairman Jerome Powell, is “a long way off” from its inflation target, said Dan Raju, founder and CEO of Tradier, a brokerage and financial technology services company. He told Insider that he sees a February rate move of 50 basis points still in play and predicts rates will hit 6% this year.

“I think the Fed should continue to take an aggressive stance on interest rate hikes,” he said.

JPMorgan CEO Jamie Dimon also recently said the base rate could rise to 6%.

risk appetite

Even in the face of further rate hikes, equity investors have shown an appetite for risk, Raju and Russell said.

Raju said his company is seeing a recovery in trading volumes, with shares already rising on hopes that the economy can avoid a hard landing and that the Fed has some control over inflation now. Labor market data also suggest continued strength in this area of ​​the world’s largest economy.

“Bond yields falling, the VIX falling and the dollar falling suggest that the iceberg of fear we saw last year is almost receding,” Russell said. “The market looks outside and sees a scenario of lower inflation… sees that we are reaching the end of this aggressive increase in interest rates.”