Inflation scare: Will the Fed be forced to hike interest rates before March?

Brian Sozzi · Executive Editor

Fri, Feb 11, 2022, 3:42 AM 2 min read

The mood on Wall Street in the wake of Thursday's shocking CPI print isn't based on if the Federal Reserve will be forced to hike interest rates when it meets in mid-March, it's whether they need to move before that meeting to send a strong signal to markets.

"Interestingly the market now prices some risk of an emergency hike before March. Fed funds futures for the month of February finished the day at 12.5bps, despite the fed funds rate printing at 8bps everyday so far in February, implying some small probability that the Fed will raise rates between now and the end of the month," points out Deutsche Bank's Jim Reid.

The Consumer Price Index (CPI) registered a 7.5% annual gain in January, the BLS said Thursday. Consensus economists were looking for a 7.3% rise. This represented the fastest rise since 1982, as well as an acceleration from the 7.0% year-over-year increase seen in December.

Corporate America continues to warn on prices for things like labor and commodities are simply getting out of control, forcing them to jack-up prices on consumers.

"Based on what we see right now, it's going to be high-single digits to 10% [potential price increase in 2022]," PepsiCo CFO Hugh Johnston told Yahoo Finance Live moments after the CPI results hit.

Goldman Sachs Chief Economist Jan Hatzius notes the Fed hasn't delivered an intra-meeting rate increase since 1994. And, it hasn't started a hiking cycle with a 50 basis point increase since the 1980s.

But Hatzius isn't ruling anything out.

"While it is not our base case [the Fed raises rates before March], we do see the rationale for a 50bp rate hike in March. One argument is that the level of the funds rate looks inappropriately low, which might call for a quicker realignment," Hatzius says.

Wall Street pros are currently tripping over themselves to factor in more rate increases in 2022 following January's inflation scare.

For its part, Deutsche Bank now sees a 50 basis point rate hike in March and five more 25 basis point increases in the year. Goldman's Hatzius lifted his expectation for rate hikes to seven hikes for 2022 from five.

Amid those expectations for accelerated rate increases, Deutsche Bank's Reid says it's time to begin worrying about a recession.

"It also raises the risk that a recession might be increasingly difficult to avoid," Reid adds.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.