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Friday, June 21, 2024

Inflation Remains Elevated, Possibility of Further Rate Hikes

Key Takeaways:

  • The latest CPI data shows that inflation is still above the Federal Reserve’s target, with CPI rising 0.4% in March and 3.5% year-over-year.
  • The higher-than-expected inflation readings caused the S&P 500 to decline and the U.S. dollar index to rise, as investors anticipate further interest rate hikes.

Inflation Data

Inflation data released today showed that while price pressures have eased somewhat over the past year, inflation remains high and above the Federal Reserve’s target. CPI rose by 0.4% in March, slightly above consensus estimates of 0.3%, bringing the year-over-year inflation rate to 3.5%. Core CPI also increased 0.4% last month and is up 3.8% from a year ago.

The higher-than-expected inflation readings shocked markets, with the S&P 500 declining nearly 1% and the U.S. dollar index (DXY) shooting up over 1% as investors priced in the likelihood of additional interest rate hikes from the Fed. The central bank has already raised rates aggressively over the past year to combat inflation, bringing the federal funds rate to a target range of 5.25-5.50%. However, Fed officials have signaled that they may need to tighten monetary policy further if inflation does not show clear signs of moving back towards their 2% goal.

S&P 500 1-Minute Price Data
DXY 1-Minute Price Data

Federal Reserve Speech by Bowman and Powell

In a speech last week, Fed Governor Michelle Bowman noted several upside risks to inflation. This included geopolitical developments, additional fiscal stimulus, tight housing markets, and the potential for inflation to prove more persistent than anticipated. Bowman said the Fed “will continue to watch the data closely” in assessing the appropriate path for interest rates and cautioned against lowering rates “too soon or too quickly” which could cause inflation to rebound.

Fed Chair Jerome Powell had a similar tone in remarks earlier this month, stating that reducing rates prematurely could “result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2 percent.” Powell said the Fed does not expect it will be appropriate to cut rates until they have “greater confidence that inflation is moving sustainably down toward 2 percent.”

The Current Economy

Today’s inflation data suggests the Fed still has more work to do in restoring price stability. While supply chain healing and improvements in the availability of workers have helped ease some inflationary pressures, strong consumer demand brought on by pandemic-era excess savings is keeping upward pressure on prices, especially in the service sector. Shelter costs, which make up about a third of the CPI index, have also remained elevated amid an ongoing housing shortage.

The Federal Reserve needs to make sure to not tip the economy into a recession. Many economists worry that by continuing to hike interest rates in the face of weakening economic growth, the central bank could end up overtightening and causing a contraction in activity and employment. Already, the rapid rise in borrowing costs has weighed heavily on interest-rate-sensitive sectors like housing and manufacturing.

However, Fed officials appear willing to accept some economic pain in the near term in order to avoid the larger long-term costs of allowing inflation to become entrenched. In the 1970s, the Fed failed to act decisively to lower rising prices, resulting in a damaging wage-price spiral that took over a decade of high-interest rates and two recessions to finally break. Today’s policymakers seem resolved not to repeat those mistakes.

While markets are currently pricing in a terminal fed funds rate of around 5.5%, a continued stream of hot inflation numbers in the coming months could cause expectations to shift higher.

Publisher and editor of LJLNews. I am a Stock Market enthusiast, with an interest for politics. I hope you enjoy reading the articles! Contact me at: Lazaruslucas@ljlnews.com

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