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Investors anxious on whether inflation could 'overheat' again

Fri, Feb 16, 2024, 8:06 AM

January's Producer Price Index (PPI) data rose above much higher than expected both month-over-month and year-over-year, compounding on the implications of this week's hot CPI inflation print. Atlanta Fed President Raphael Bostic is among the cast of Federal Reserve officials who are in no rush to cut interest rates in early 2024 on this data.

SoFi Head of Investment Strategy Liz Young joins Yahoo Finance Live to discuss investor sentiments coming off of January inflation data and what the Fed could be forecasting for "later rather than sooner" rate cuts in 2024.

"If we get bad data again for February, if things have heated up quite a bit, then I think investors really start to take heed that... maybe we shouldn't even cut rates starting in May or June, and that's where we start to get nervous," Young explains. "You have to think about what drove... the rally towards the end of the year last year. It was the expectation that the Fed was going to pivot, that inflation had been solved, that rates were going to come down sooner than maybe we had originally expected."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

RACHELLE AKUFFO: Wholesale prices in January coming in hotter than expected, making the road to rate cuts even more complicated. This week, Atlanta Fed President Raphael Bostic saying, quote, "Inflation might come down more slowly than the pace implied by where the markets signal monetary policy should be."

Well, for what this means for investors, Liz Young, SoFi head of investment strategy, is here. Thank you for joining us, Liz. Obviously, it's been a week of-- it's been a week when it comes to economic data here-- markets really just all over the place when it comes to this.

What should we be focusing on? Because it seems like the Fed focus is more on PCE. Investors seem to be looking at everything else or not giving it as much weight.

LIZ YOUNG: Right, well, we don't-- we don't get the PCE data until later this month. I do think that because of the CPI print this week and because of the PPI print this week, now the data is stacking up against investors in a way that's making people more nervous. So I think there will be a lot more watchful eyes on PCE later this month.

But so far, what we've seen-- and it's just really one month, and a lot of people have been saying we were expecting a little bit of a heat up in the January data. Even the Fed themselves, there have been a number of speakers that have said, this is still consistent with the path that we were expecting. What we've seen, though, is that investors, I think, are getting nervous about the idea that we could possibly overheat again, and that risk is still alive.

So the volatility, particularly the volatility that we're seeing in yields, is telling that story, that we're not quite out of the woods yet-- not necessarily that inflation is heating back up and on a new trend. It's-- again, it's just one month. But that risk that things could get hotter and not be going down in the linear fashion that we had expected is still around.

- So I'm curious, then, Liz, if we have that red-hot CPI print, and then we've got the hot PPI print, I'm looking at the market so far today. The S&P says, eh, we're focusing on the good news. We're focusing on chips and Apple. I'm curious, at what point does the data start to make it difficult for us to be betting on this Fed pivot? When will the market start to believe in this Fed victory lap that's been happening throughout the week?

LIZ YOUNG: I-- see, I interpret it differently. I don't think the Fed is taking a victory lap. I think that they've been pretty consistent with their messaging that we're not confident yet that we've solved the problem, which is why they consistently pushed back on that March rate cut. It moved to May, then it moved to June. And I think that that strategy so far has worked for them because expectations of an earlier cutting cycle have completely dissolved.

The yield volatility is showing us that investors are reacting to some of this data. But it's going to take-- if we get bad data again for February if things have heated up quite a bit, then I think investors really start to take heed that, OK, maybe we shouldn't even cut rates starting in May or June. And that's where we start to get nervous.

So you have to think back about what caused that rally, what drove the rally towards the end of the year last year. It was the expectation that the Fed was going to pivot, that inflation had been solved, that rates were going to come down sooner than maybe we had originally expected. Now we have to unprice some of that expectation, and that's what's happening a little bit here.

Equities have wobbled here and there but only for about a day at a time. What I think would happen is if the data continued to stack up over the next couple months, that things were still too hot, then we would have to listen to the Fed. And they would continue to tell us, I think, that rates are going to stay higher for longer because we need to get confident that this problem is solved.

And again, one of the things that Jerome Powell has said at almost every press conference, even in his prepared remarks, is that high inflation does not work for anyone. So that is a number-one priority. They're going to continue to fight that battle.

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Investors anxious on whether inflation could 'overheat' again

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