As for the Fed’s next move, the biggest fear is that we are headed toward a period of rapidly increasing prices as well as rapidly increasing interest rates that will ultimately smother economic growth, aka “stagflation.”

Unfortunately, we won’t officially know their plans until after the two-day FOMC meeting scheduled for March 15th and 16th. However, Federal Reserve Chief Jerome Powell will testify before Congress next Tuesday and Wednesday, March 2nd and 3rd in what are likely to be his final public remarks on monetary policy before the U.S. central bank begins raising interest rates to fight decades-high inflation.

Inflation question

The question here is how fast and how high will the Fed have to move rates to slow inflation. Many bears argue much higher than the trade is anticipating because the covid supply chain issues have gotten deeper and wider than originally thought.

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In simple terms, allowing parts of the country to stay closed and shut down much longer than originally thought has created deeper chasms that we now have to try and traverse.

If you remember, it was June of 2006 when then-Federal Reserve Chairman Ben Bernanke and his colleagues raised short-term interest rates another quarter-percentage point for a 17th straight time, bumping up the benchmark overnight lending rate to 5.25%, extending an unprecedented two-year campaign to keep a lid on inflation. The Fed’s moves immediately raised borrowing costs for businesses and consumers on a wide range of loans. Ultimately, commercial banks pushed the prime rate to +8.25%. I don’t think we see anything like that but how can we completely rule it out considering inflation is much hotter. JPMorgan released a statement yesterday saying they now expect the Federal Reserve to hike interest rates for nine consecutive meetings. Meaning every FOMC meeting until March 2023 or more than likely a +2.25 or +2.50% jump in the Fed Funds Rate. Ouch!

A few bullish Wall Street insiders have suggested the Fed may opt to be less aggressive in raising rates and reducing its balance sheet considering the uncertain situation with Russia. However, inflation hawks are quick to point out that inflation was relentlessly climbing well before the Russia-Ukraine conflict even started having a noticeable impact on global oil and commodity prices, meaning the Fed is still under tremendous pressure to at least attempt to rein in inflation.

Bulls are extremely nervous that key data this week will fail to show any signs that price pressures are easing. Some think higher mortgage rates could help cool the meteoric rise in home prices but most still expect the year-over-year gains will continue to outstrip the pace of wage gains.

Data to watch

Data on Friday showed Existing Home Sales rose +6.7% in January with the inventory of unsold homes falling -2.3% from December and -16.5% from a year ago.

At the current sales pace, that amounts to a record low 1.6 months’ supply. Home prices are influencing rent prices too, helping push up shelter expenses across the board. Keep in mind, shelter is the largest expense for most U.S. consumers, and also the biggest component of the Consumer Price Index.

The other key inflation release this week is Friday’s PCE Prices Index, one of the Fed’s favorite gauges. Analysts anticipate the monthly rate of gains accelerated last month, pushing the annual rate up to +6.1% from +5.8% in December. Investors will also be closely scrutinizing “Fed speak” this week with several regional Fed Presidents scheduled to deliver remarks. Federal Reserve Governor Michelle Bowman said yesterday that she was open to lifting interest rates by a half point at the March 15-16 meeting, joining at least one other Fed official (St. Louis Fed President James Bullard) in calling for a higher-than-typical rate increase.

Interest Rate’s Play To Slow Inflation by Inna Rosputnia

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