- Investors are expecting the Fed to back off on February’s rate hike.
- Easing inflation fuels a bullish view of a 25 basis point move, but housing prices may still look sticky to policymakers.
- Market moves suggest the “iceberg of fear” around inflation is receding, an analyst said.
Loading Something is loading.
Thanks for registering!
Access your favorite topics on the go in a personalized feed. Download the app
US inflation is broadly moderating, bolstering expectations that the Federal Reserve will delay rate hikes further lower, but sticky core prices mean there is still a risk that policymakers will stick with their current pace, analysts say .
Expectations that the Fed would raise interest rates by 25 basis points on February 1st rose by comparison after last week’s December inflation report, which showed the annual rate slowing to 6.5% from 7.1% in November with the 50 basis points of the previous month’s hike.
But inflation remains above the Fed’s 2% target and policymakers are keeping a close eye on non-energy and food prices. The December core rate was 0.3% m/m versus 0.2% in November. Housing inflation, which monitors costs for renters and homeowners, rose 0.8%. The Bureau of Labor Statistics said the protective index was the “dominant factor” that drove the core index higher.
“The CPI report was in line with consensus, but the details paint a picture of ongoing pressures at the core,” Jefferies economists Aneta Markowska and Thomas Simons wrote in a note this week.
“We think, that [the CPI] The report has a 50 basis point hike on the table for the next FOMC meeting, although it is by no means a high conviction,” the economists said. “Regardless of the size of the next hike, we expect FOMC to hit 5.1%, the question is will we get there in March or May.”
David Russell, vice president of market intelligence at multi-asset trading platform TradeStation, told Insider he also sees potential in the Fed sticking with a half-point rate hike at the upcoming meeting.
“There is a risk that the Fed will remain hawkish to ensure inflation is really dead and buried,” he said, noting that there are still upward pressures on shelter inflation.
Russell said the bigger issue is how much the Fed plans to raise interest rates, which are currently in a 4.25% to 4.5% range. Recent quarterly Fed forecasts suggest central bankers see the final interest rate at 5.1% this year, while investors are expecting 5.25%.
The Fed, led by Chairman Jerome Powell, is “far off” from its inflation target, said Dan Raju, founder and CEO of Tradier, a brokerage and financial technology services company. He told Insiders he sees a 50 basis point rate move in February still in play and forecast rates would hit 6% this year
“I think the Fed will continue to take an aggressive stance on rate hikes,” he said.
Jamie Dimon, CEO of JPMorgan, recently said interest rates could rise to 6%.
appetite for risk
Even in the face of more rate hikes, equity investors have shown risk-taking, Raju and Russell said.
Raju said his firm is seeing trading volumes picking up, with stocks already bouncing on hopes the economy might avoid a hard landing and the Fed now has inflation somewhat under control. Jobs data also point to continued strength in this area of the world’s largest economy.
“Falling bond yields, falling VIX and falling dollar suggest the iceberg of fear we’ve seen over the past year is almost fading,” Russell said. “The market is looking ahead and they’re seeing a lower inflation scenario… they’re seeing we’re reaching the end of this aggressive rate hike.”