Did January Inflation Numbers Spark Market Overreaction? ‘It’s Not That Big Of A Deal,’ Says Former CME Group Chief Economist

Tuesday’s consumer price inflation data disappointed equity market investors who were still — despite the Federal Reserve’s insistence otherwise — hoping for the first rate cut in March.

“Jerome Powell already said he wasn’t going to cut rates in March. I think the problem was the markets didn’t believe him. They believe him now — that’s what came through in Tuesday’s market reaction,” said Bluford Putnam, former chief economist at CME Group, during an appearance on Benzinga’s PreMarket Prep on Wednesday.

“The number was a little hotter than I expected. But there’s a decent amount of volatility in the monthly numbers. I don’t see anything really different going on,” he added.

While the year-over-year numbers improved a little, it was the rise — by one-tenth of a percentage point — in the month-over month numbers that surprised the markets.

Indeed, on Tuesday, the S&P 500 index fell by 1.4%, while the NASDAQ lost 1.8%. The exchange traded funds that track these indexes, the SPDR S&P 500 ETF (NYSE:SPY) and the Invesco QQQ Trust (NYSE:QQQ) fell by similar amounts.

How Will Fed React To Inflation Data?

Putnam believes the Fed will wait until at least June — possibly July — to start cutting rates, he doesn’t think it would have anything to do with just one month’s inflation data. It’s more about Fed confidence.

“If you look at the annual number and you take out shelter, you’ve been under 2% for around six or seven months — and you’re still there. This number didn’t change on Tuesday,” he said.

“The Fed wants to see a few more months of data because it needs to gain confidence.”

He explained that because the Fed was slow to start raising rates, it was seen as policy mistake in hindsight. And now that it looks increasingly like a recession will be avoided, the Fed doesn’t want to make a mistake by cutting too soon and possibly rekindling the fires of inflation.

Putnam said: “If a recession were to develop they’d have to cut rapidly. But if it doesn’t develop, it buys the Fed time, and it really doesn’t want to make a mistake. It would rather be late, because it doesn’t feel urgency here, and I wouldn’t argue with that.”

He added: “It’s not that big of deal to see one-tenth of a percentage point higher in the CPI…