Inflation overshot expectations in December and raised the question of whether the Federal Reserve’s dovish pivot at its last policy meeting might have been too soon.
It’s been a tough slog for the Fed to get inflation back down to its 2% target and, as long distance runners know, it’s always the last mile that hurts the most.
In December, the annual headline rate of consumer price inflation (CPI) rose to 3.4%, up from November’s rate of 3.1%. Economists had predicted a rise, but only back up to 3.2% — and this was expected to have been just a temporary blip.
Stock Indices Fall
Market reaction was negative, with all major indices showing opening losses. The SPDR S&P 500 ETF (NYSE:SPY), an exchange trade fund that tracks the S&P 500 Index, was down 0.8% in midday trading.
Worst affected was the Russell 2000 Index of small cap stocks — a sector that comprises many companies with debt that becomes more costly to service under higher interest rates. The iShares Russell 2000 ETF (NYSE:IWM) was down 1.8% in midday trading.
Markets Discounting March Rate Cut
So, do economists and equity market analysts believe the inflation numbers mean the Fed will stay higher for longer?
On X (formerly Twitter) The Kobeissi Letter said that following the data, prediction markets were “severely discounting a March rate cut.”
It added: “We started 2024 with a 70%+ chance that interest rate cuts begin by March. After the strong jobs report and a hot inflation reading, odds have nearly halved.
“The market is setting itself up for disappointment by pricing in six or more rate cuts this year. Can the Fed really pivot right now?”
Also Read: Inflation Rises More Than Expected To 3.4% In December, Rattling Traders Betting On Fed Rate Cuts
Sticky Service Sector And Housing Rents
Joe Brusuelas, chief economist at RSM US, said that the sticky inflationary areas remained mainly in the service sector — which increased 5% on a year-over-year basis — and in housing costs, which increased 4.8% on an annual basis, driven by rises in owner equivalent rents.
He said: “We have never been in the March cut camp and our 2024 forecast of four twenty-five basis point rate cuts starting in June stands in contrast with the current consensus which implies six rate cuts this year.”
He added: “The last…
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