Despite January’s Inflation Report, Fed Isn’t Inclined to Immediately Hike Interest Rates

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Markets were rattled on Feb. 10 as inflation rose again in January, with the Consumer Price Index for All Urban Consumers (CPI-U) increasing 0.6% — bringing the overall inflation rate to 7.5% according to a U.S. Bureau of Labor Statistics report. This news was coupled with Federal Reserve Bank of St. Louis President James Bullard’s comments in support of raising interest rates by a full percentage point by the start of July — including the first half-point hike since 2000 — in response to the hottest inflationary period in four decades, Bloomberg reported.

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“I’d like to see 100 basis points in the bag by July 1,” Bullard said in an interview with Bloomberg News on Feb. 10. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

However, Bloomberg reported that Federal Reserve officials are in no rush to raise interest rates as an emergency increase risks signaling panic — and cementing criticism that the central bank is too far behind in reining in inflation.

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Craig Erlam, senior market analyst (U.K. & EMEA) for OANDA, wrote in a note sent to GOBankingRates that stock markets are ending the week in the red after investors were dealt another inflation blow on Feb. 10, which dampened sentiment once more.

“We’re now entering into quite uncomfortable territory and the very real prospect of multiple rate hikes before the summer as well as a 50 basis point increase to kick things off in March,” Erlam wrote in the note. “What’s more, the Fed’s Bullard even floated the idea of unscheduled meetings to raise rates and respond more quickly to the data, which seems rather radical. But then, inflation is at a 40-year high, almost four times the Fed’s target, and is accelerating faster than most continue to anticipate.”

Discover: Interest Rates: Will Steep Rise in Wages Cause the Fed To Be More Aggressive on Rate Hikes?

Market analysts quickly reacted on Feb. 10, as 94% of those polled saw a chance of a 50 basis point (or greater) rise for the Fed’s March meeting, up from 34% just a week ago, according to the CME FedWatch tool. This sentiment calmed down on Feb 11., dropping to 61% of those polled — still a majority, however.

Erlam added that a 50 basis point hike in March is now backed quite heavily in the markets — even though a number of policymakers are still unconvinced — with further hikes following at consecutive meetings after that.

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Indeed, Bloomberg reported that some Fed officials are not in favor of aggressive rate hikes, including San Francisco Fed President Mary Daly. Daly told Market News that a half-point rate hike “is not my preference,” citing the lingering drag of the pandemic and the fact that the Fed is already sending a clear message on its readiness to act. “Markets have already priced in the withdrawal of accommodation, and that is them hearing what the Fed is clearly communicating,” she told Market News.

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Thomas Barkin, president of the Richmond Fed, backed this notion on Feb. 10 while speaking at a Stanford Institute for Economic Policy Research event.

“I’m open to it [an aggressive rate hike] conceptually,” he said, according to Bloomberg. “Do I think there’s a screaming need to do it right now? I’d have to be convinced of that.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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