Recently released minutes from the Federal Reserve’s January 31–February 1, 2023, meeting show that members of the central bank are dedicated to fighting inflation. Higher-than-expected inflation readings may lead the Federal Reserve to enact stricter monetary policy than previously anticipated.
The Federal Reserve’s fight against inflation might not be slowing down.
Inflation is still high, according to the latest readings from the Consumer Price Index (CPI) and Producer Price Index (PPI). The CPI increased to 6.4% on an annual basis in January 2023, while the PPI rose to 6%. Both increases were more than economists expected.
Before this data was released by the Labor Department in mid-February 2023, Federal Reserve officials were already discussing how “ongoing rate hikes” would be necessary. According to minutes from the January 31–February 1, 2023, meeting, Federal Reserve officials “stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.”
Future interest rate hikes by the Federal Reserve may be large.
Federal Reserve Governors James Bullard of the St. Louis Fed and Loretta Mester of the Cleveland Fed both expressed desires for larger rate hikes than the previous hike of 0.25%. At an event on February 16, 2023, Mester said, “At this juncture, the incoming data have not changed my view that we will need to bring the [federal] funds rate above 5% and hold it there for some time.”
According to MarketWatch, traders are increasingly pricing in the chance that the federal funds rate (the primary interest rate set by the Federal Reserve) could reach 5.75–6%. Currently interest rates are in a range of 4.5–4.75%.
Tight monetary policy will continue to impact markets.
Marko Kolanovic, JPMorgan Chase & Co.’s top strategist, says he expects the S&P 500 Index to continue its downward trajectory until the Federal Reserve stops raising rates. On a February 22, 2023, interview with CNBC, Kolanovic said, “We really think the Fed will need to cut the rates for the market to rally on a sustainable basis.”
Michael Wilson, chief U.S. equity strategist and CIO at Morgan Stanley, warns that stocks are entering a “death zone” and that the S&P 500 could fall as much as 26%. In a note to clients, Wilson predicts that stocks will fall as equity traders prepare for the Federal Reserve’s rate hikes.
The Federal Reserve’s tight monetary policies are expected to continue affecting asset prices in the near future. Consumers holding those assets may wish to closely watch how the central bank’s policies could impact them.
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