Data showing the fastest pace of price increases since 1982 is now raising expectations for an aggressive move from the Federal Reserve not seen since 2000: a double rate hike.
On Thursday morning, the Bureau of Labor Statistics reported that prices in the United States rose by 7.5% between January 2021 and January 2022. The hot figure on the Consumer Price Index (CPI) was above economists’ estimates and represents the highest reading seen in 40 years.
To tamp down inflation, senior officials at the nation’s central bank signaled they will soon raise the federal funds rate — thus increasing borrowing costs — to dampen consumption that could be driving higher prices. The Fed has held interest rates at near zero since the beginning of the pandemic, but markets were bracing for the first rate hike (of 25 basis points) in mid-March.
The chatter over above-estimated inflation is now raising questions about whether or not the Fed should deliver on a 50 basis point move in mid-March. The central bank has not delivered a “double” rate increase in a single policy decision since May 2000.
Deutsche Bank Securities Chief U.S. Economist Matthew Luzzetti told Yahoo Finance Thursday that the Fed had been wary of spooking markets with too aggressive a move, but now has no excuse to be “dovish” on easy money policies with inflation as high as it is.
“Up until today and this inflation print, there was a very compelling reason for the Fed not to go 50 basis points. To me, the recent data is signaling something that is very different,” Luzzetti said. “It’s a broadening out of inflation pressures, it’s an acceleration in those components that you should be worried about.”
Odds favor a double move in March
At least one Fed official has already voiced support for a double move.
St. Louis Fed President James Bullard, one of the voting members of this year’s policy-setting Fed committee, told Bloomberg after the inflation report that he supports a 50 basis point hike in the next meeting on March 15 and 16.
Fed funds futures, the market for bets on future rates moves, had been pricing in a 24% chance of a double move prior to the inflation report. But after the CPI and Bullard’s remarks, those bets raised those odds to nearly 94%.
Those inside the White House were closely watching Thursday's print given the emergence of inflation as a critical political issue facing President Joe Biden. As the White House pins higher inflation on reduced competition in certain industries and supply chain hold ups, officials inside the administration insist they are optimistic the numbers will decline later this year.
White House Council of Economic Advisers Member Jared Bernstein told Yahoo Finance Thursday that the Fed will also play a key role.
“When it comes to the broad inflation mandate, first and foremost, we’re really talking about the Federal Reserve,” Bernstein said, adding that Biden will respect the central bank’s independence in its policymaking.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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