Federal Reserve Raises Interest Rates to Combat Inflation, Stock Market Reacting
The Federal Reserve is continuing its anti-inflation campaign, raising interest rates in an effort to bring prices under control and prevent a recession in 2023. On Tuesday, the Bureau of Labor Statistics released its Consumer Price Index (CPI-U) report, showing that overall prices rose 0.5% in January, an increase of 6.4% from a year earlier. Core CPI, which excludes food and energy, rose 0.4% last month, and was up 5.6% from a year earlier.
The 10-year Treasury yield rose 5 basis points to 3.81%, a 2023 high, with the two-year note climbing as much as 12 basis points to nearly 4.64%, the highest since November and within 20 basis points of last year’s multiyear high. Yields for three- and five-year bonds reached their highest levels since 20
Inflation has caused the Fed to raise its policy rate eight times since March 2022, most recently to a range of 4.5%-4.75% on Feb. 1. Thomas Barkin, the President of the Richmond Fed, commented that if inflation continues to soar beyond what is comfortable, the central bank may have to increase interest rates to a greater extent than initially anticipated. Meanwhile, Philadelphia President Patrick Harker said he believes policymakers will need to raise interest rates to some level above 5% to counter inflation that is retreating only slowly.
Bill Smead, Chief Investment Officer at Smead Capital Management, believes that inflation is going to be “far stickier and longer lasting,” and could last a decade, due to favorable demographics in the U.S. Federal Reserve Chair Jerome H. Powell also said the lengthy process of getting inflation down is probably “not going to be smooth. It’s probably going to be bumpy.”
The CPI report is Tuesday is expected to show inflation has eased, which would reinforce Powell's belief that disinflation is underway. U.S. stocks descended at Wednesday's open as investors pondered the outlook for interest rates after the data showed strong consumer spending and an uptick in inflation across January.
As the U.S. dollar surged, and reports suggested that U.S. stockpiles had increased, the price of oil kept dropping in the commodities markets. On Wednesday morning, the price of West Texas Intermediate (WTI) crude futures, the U.S. benchmark, decreased by 1% and was hovering around $78.
0. “CPI: Prices rise 6.4 percent in January, seventh month of easing inflation” The Washington Post, 14 Feb. 2023, https://www.washingtonpost.com/business/2023/02/14/inflation-easing-cpi-january/
1. “Consumers May Face ‘Reckoning' As Inflation's Descent Slows” Investopedia, 14 Feb. 2023, https://www.investopedia.com/consumers-face-reckoning-as-inflation-descent-slows-7109620
2. “U.S. inflation is likely ‘far stickier' and could last a decade, Bill Smead says” CNBC, 14 Feb. 2023, https://www.cnbc.com/2023/02/14/bill-smead-us-inflation-is-far-stickier-and-could-last-a-decade.html
3. “Dow Jones Dives 345 Points On Hot Inflation Data; Shopify Plunges On Earnings” Investor's Business Daily, 16 Feb. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-fall-ahead-of-inflation-data-jobless-claims-shopify-plunges-on-earnings/
4. “Traders Capitulate, Abandoning Fed Rate Cut Bets After CPI Spike” Yahoo News, 14 Feb. 2023, https://news.yahoo.com/traders-capitulate-abandoning-fed-rate-213611625.html
5. “Consumer prices rose 6.4% in January” Fox Business, 14 Feb. 2023, https://www.foxbusiness.com/economy/will-cpi-reinforce-powells-disinflation-view
6. “U.S. stocks are falling after retail sales fuel rate fears By Investing.com” Investing.com, 15 Feb. 2023, https://www.investing.com/news/stock-market-news/us-stocks-are-falling-after-retail-sales-fuel-rate-fears-3004284
7. “Stock market news today: Stocks rise after strong retail sales data” Yahoo News, 15 Feb. 2023, https://news.yahoo.com/stock-market-news-today-february-15-2023-130622082.html
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