I hope you all are healthy and doing well.
It seems like every time I turn to CNBC or Bloomberg news, The Fed, meaning the Federal Reserve Bank, is dominating the headline news and economists with all points of view, and everyone else in the Financial Industry still can’t figure out when the Fed will stop raising interest rates.
Coming into 2023, markets had been pricing in two 25 basis point (0.25%) interest rate hikes, one in February and the second one at the next Fed meeting on March 21-22. In addition, there were expectations of an interest rate cut at the end of the year. All macro-economic indications suggested that with inflationary pressures easing, the Fed would be moving closer to its final “terminal” rate by the second half of the year. The only question was would the Fed stay on hold throughout 2023 before lowering rates in 2024, as suggested by a consensus of Fed members.
However, recent data releases, including the Consumer Price Index (CPI), Producer Price Index (PPI), and retail sales, showed inflation inching higher and a consumer still spending at a healthy pace. Even amid weak housing data for January, home builder sentiment improved nicely and exceeded expectations. Factoring in all of the data releases, including disappointing Industrial production figures, the Atlanta Fed’s GDP Now real-time tracker of gross domestic product inched higher to a solid 2.5% for the first quarter.
The fed funds futures market quickly adjusted probabilities as well, pricing in a potential third interest rate hike at the Fed’s June meeting.
What has caught the market’s attention, however, is the slight probability for a 50 basis point rate hike at the March meeting has been climbing higher, as two non-voting members of the Federal Open Market Committee (FOMC), Loretta Mester and James Bullard, made comments suggesting a 50 basis point rate hike in March may be necessary to help tackle inflation. Markets are listening, which you can clearly see in last week’s S&P 500 decline.
So what does this all mean? We will continue to re-balance portfolios, stay partially invested, understanding that we will continue to see volatility until we get a clearer view of where inflation and interest rates will be headed.
Please contact Kati or me if you have any questions. I look forward to speaking with each and everyone of you soon.
Thank you.
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