The inflation monster strikes back, Fed officials turn hawkish, will the end point of interest rates be extended again?
The U.S. Department of Commerce announced on Friday that the core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, increased by 0.6% month-on-month and 4.7% year-on-year, significantly exceeding market expectations. As the PCE index is a key inflation gauge closely monitored by the Federal Reserve and several Fed officials have been consistently hawkish, investors have renewed expectations of interest rate hikes. The current market expectation for the terminal interest rate is now between 5.25% and 5.5%, indicating room for three more rate hikes in the future.
Table of Contents
Fed Officials Remain Hawkish
The Federal Reserve announced a 1-point rate hike on February 1, raising the target range for the benchmark interest rate to 4.5% to 4.75%, with all decision-makers in unanimous agreement. However, Cleveland Fed President Loretta Mester stated in an interview with CNBC that the meeting should have included a 2-point hike, with the benchmark rate needing to rise above 5% and be maintained for a period.
St. Louis Fed President James Bullard also noted his support for a 2-point hike at the last meeting and urged for a quicker move towards a benchmark rate approaching 5.5%. He expressed confidence that the U.S. can conquer inflation in 2023 without causing an economic downturn.
While Mester and Bullard have hawkish stances, neither of them have voting rights this year.
Markets Concerned about Prolonged Rate Hikes
According to data from CME FedWatch, investors are once again expecting further rate hikes. In addition to a projected 1-point increase in March, the probabilities of hikes in May and June by 1 point each have significantly risen. The current market expectation for the endpoint interest rate is between 5.25% to 5.5%. Not long ago, the market anticipated that 4.5% to 4.75% would mark the end of this rate hike cycle.
Due to concerns about rate hikes, the S&P Index fell by 1.05% on Friday, the NASDAQ dropped by 1.69%, and cryptocurrencies also saw declines, with BTC falling to 23,200 and ETH hovering around 1600.