Another week, another inflation report, expect more Fed interest-rate resetting
Last week it was an inflation report followed by a recalibration of how high the Federal Reserve will raise interest rates to curtail consumer price increases.
It may be the same this week.
The central bank’s favored inflation gauge, the Personal Consumption Expenditure, will be released on Thursday. Don’t be shocked if it mimics the January Consumer Price Index. Last month’s CPI showed prices increased from December, while continuing the months-long trend of slowing inflation compared to 2021. Still, inflation remains uncomfortably high, posing an ever-present risk to the economy.
Four regional Federal Reserve presidents were exercising the bank’s openmouth policy the same day as the CPI data went public last week.
“Normalizing” is how Richmond Fed President
Thomas Barkin described inflation to Bloomberg TV. “It feels to me like the risk is on the inflation side at this point, rather than the economy side.” Meaning: interest rates need to go higher.
The central bankers are balancing a strong U.S. job market helping support inflation through wage increases with escalating borrowing costs in the effort to slow consumer price increases. Expect more open-mouth exercises this week.
Traders, economists and Fed watchers talk about a “terminal rate.” That’s the interest rate to hit that will stop the Federal Reserve from raising its target short-term rate. Is it 5%, 5.5%, or 6%?
The target range today is 4.5% to 4.75%. The stock market is predicting a terminal rate of 5.5% this summer, according to the CME FedWatch Tool.
So, further tightening is likely. Just how much is what has investors anxious because the expected terminal rate continues climbing. The anticipated terminal rate was 4.6% just five months ago. By December, that had increased to 5.1%.
Demand-side economist John Maynard Keynes is often cited as having said,
“When the facts change, I change my mind.” Even though the accuracy of that attribution is questionable, the sentiment continues to be the Fed’s playbook.
And Thursday’s Personal Consumption Expenditure data likely will be more evidence that the Fed’s mind on how high interest rates need to go in its inflation fight is changing.
Tom Hudson is chief content officer at WAMU public radio station in Washington, D.C.