The Federal Open Market Committee will meet this week and likely announce a 50 basis point hike in the Fed Funds rate, taking the short-term marker from .50% to 1.00%. Market forecasters will be keenly monitoring the Fed’s subsequent dot-plot, as well as Chair Powell’s comments at the post-meeting debrief, for clues into the pace of future interest rate hikes.
With the March Consumer Price Index showing a +1.2% MoM rise and the Producer Price Index edging up a greater than expected +1.4% MoM, it’s clear the Fed has a long way to go before it catches up to today’s inflation readings. CPI is running at +8.5% on a YoY basis while PPI has surged +11.2%. The Fed’s favored measure the PCE Core Deflator is even up +5.2%, while the Fed Funds rate remains sub 1%.
Despite the move higher in mortgage interest rates, the housing market remains hot. The S&P CoreLogic CS 20-City index surged +2.4% MoM in February and is now up +20.2% YoY. The fundamental mismatch between the current supply and current demand for housing suggests that prices may remain robust, even in the face of higher mortgage rates. Housing Starts rose +0.3% in March, while Existing Home Sales fell -2.7% and New Home Sales dropped -8.6%.
The first look at Q1 GDP came in lower than expected with the report showing the economy contracted -1.4% on an annualized basis (expectations were for growth of +1.0%). The consumer remained strong in March as Personal Income rose +0.5% while Personal Spending surged +1.1%, beating expectations for a +0.6% rise. The ISM Manufacturing reading for April came in below expectations at 55.4, although still suggestive of expansion.
The labor market remains challenged as the Unemployment Rate for March came in at 3.6% while the latest JOLTS report showed more than 11 million jobs available. The Employment Cost Index is up +4.5% YoY as of the end of Q1, and upward pressure remains on wages as the world continues to grapple with Covid-related disruption.
The aforementioned Federal Reserve meeting this week should offer a glimpse into its thinking on inflation and the subsequent pace of interest rate hikes needed to quell rising prices. Markets are nervously anticipating various outcomes, including a 75 basis point hike this week. Further hawkishness will be required in order to convince investors the Fed truly grasps the pernicious nature of inflation. Having hidden behind the “transitory” thesis for too long, the Fed’s credibility with regard to inflation fighting is clearly on the line.
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