Will Inflation Determine the Fed’s Interest Rate Policy?
By Economists expect the latest U.S. Consumer Price Index (CPI) report to show that inflation has eased in January, which would reinforce Federal Reserve Chair Jerome Powell's belief that disinflation is underway.[0] The CPI is set to be released Tuesday morning and is expected to show a 0.5% increase in overall prices, with a 0.3% rise in core CPI, excluding food and energy.[0]
Data from recent times indicates that inflation is probably unlikely to decrease as quickly as the stock market anticipates.[1] The Federal Reserve will maintain a strict policy throughout the entirety of 2023.[1] The major concern is that the Federal Reserve's intended 5.1% terminal rate may not be low enough and the Federal Open Market Committee (FOMC) may need to increase rates beyond what was stated at their December Meeting.[1]
Although inflation is not increasing year-over-year, it is still more than three times the amount desired by the Federal Reserve.[2] Bill Smead, chief investment officer at Smead Capital Management, believes inflation will be “far stickier and longer lasting”, potentially for a decade.[3] This is due to favorable demographics in the United States that could result in higher prices becoming hard to bring down past a certain level.
In commodities markets, oil continued to barrel lower as the dollar rose and U.S. stockpiles were estimated to have grown.[4] WTI crude futures, the U.S. benchmark, experienced a 1% decrease Wednesday morning, trading around $78.[4]
Meanwhile, futures for the S&P 500 rose 0.3% while contracts on the tech-heavy Nasdaq-100 gained 0.4%.[5] Futures of the Dow Jones Industrial Average increased by 0.1%.[5] CSCO is part of the Dow Jones, S&P 500, and Nasdaq 100 indices[6]
The latest Consumer Price Index report could have a significant impact on the markets, depending on the actual figures. If the data shows a lower-than-expected rise in inflation, it could result in the Fed keeping interest rates low, which would be beneficial for the stock market. On the other hand, if inflation is higher than expected, the Fed may be forced to raise rates, increasing the risk of a recession in 2023.[7]
0. “Consumer prices rose 6.4% in January” Fox Business, 14 Feb. 2023, https://www.foxbusiness.com/economy/will-cpi-reinforce-powells-disinflation-view
1. “January Inflation Deals A Big Blow To The Bulls' Narrative” Seeking Alpha, 14 Feb. 2023, https://seekingalpha.com/article/4578177-january-inflation-deals-blow-to-bull-narrative
2. “Inflation leads off 2023 with a comeback” Washington Examiner, 14 Feb. 2023, https://www.washingtonexaminer.com/opinion/inflation-leads-off-2023-with-a-comeback
3. “Inflation will remain ‘sticky’ for a decade because Gen Z and millennials are in their prime spending years, an investment chief says” Fortune, 14 Feb. 2023, https://fortune.com/2023/02/14/smead-sticky-inflation-decade-millennials-gen-z-spending
4. “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
5. “Dow Industrials Slip After U.S. Inflation Data” The Wall Street Journal, 14 Feb. 2023, https://www.wsj.com/articles/global-stocks-markets-dow-update-02-14-2023-150d1da1
6. “Dow Jones Futures Fall But Market Rally Keeps Climbing; Shopify Leads 10 Earnings Movers | Investor's Business Daily” Investor's Business Daily, 16 Feb. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-market-rally-keeps-climbing-shopify-roku-cisco-are-key-earnings-movers
7. “Wholesale prices surge again, PPI shows, in sign U.S. inflation is unlikely to ease quickly” MarketWatch, 16 Feb. 2023, https://www.marketwatch.com/story/wholesale-inflation-surges-in-early-2023-ppi-shows-2efefb24
