US inflation at 40-year high
“A punch in the pit of the stomach for the Fed”
02/11/2022, 1:40 p.m
It’s inflation numbers like a thunderbolt. The fear of larger rate hikes by the US Federal Reserve is growing on the stock market. Pressure to raise interest rates faster and more drastically is now also coming from within the bank. ECB boss Lagarde also spoke up.
This is a wake-up call for many observers: US consumer prices rose in January at their highest rate in 40 years. The price development is therefore much more dramatic than expected and is increasingly putting pressure on the US Federal Reserve. Wall Street investors aren’t the only ones showing nerves. Central bankers and economists are also puzzled as to whether and how the Fed will react to this. “That could mean the Fed needs to be more aggressive,” said Peter Cardillo, chief economist at investment firm Spartan.
“This inflation data was like a punch in the stomach for Jay Powell and his colleagues,” Citi Chief Economist Nathan Sheets told CNBC. “I think we’re going to have to see an increasingly aggressive Federal Reserve. And I think 50 basis points clearly has to be on the table for March based on today’s inflation data,” Sheets continued. And even that, he added, might not be enough. It doesn’t look like inflation “will abate on its own — at least there’s no sign of it yet,” Sheets said.
Goldman Sachs: Take the risk of a wage-price spiral seriously
The economists at Goldman Sachs and Bank of America also see an urgent need for action. Goldman Sachs is forecasting that there will be “seven consecutive 25 basis point rate hikes” this year, according to the latest figures. The investment bank previously said five rate hikes for the year were likely.
Current interest rate levels appear “unreasonable, and the combination of very high inflation, hot wage growth and high near-term inflation expectations mean that concerns about spiraling wages and prices should be taken seriously,” Goldman Sachs analysts said Bank of America also expects seven quarter-point rate hikes in 2022, followed by four more next year.
The pressure on Fed Chair Jerome Powell to act more energetically is also growing from within his own ranks. St. Louis Federal Reserve Chairman James Bullard advocates a full percentage point hike in interest rates by July after January’s accelerated inflation. Bullard recommends spreading the hikes over the next three meetings, trimming the Fed’s balance sheet starting in the second quarter, and then deciding on further interest rate paths in the second half of the year based on updated data.
If there were increases of the 0.25 percentage points that had been generally expected up to now, the rate would be “only” 0.75 percent at the beginning of July. So far, most stockbrokers have not had a big step, as suggested by Bullard, on their list. In view of the previously strong price increases and the booming labor market, the Fed had already signaled that it was heading for a turnaround in interest rates, but the current US inflation data suggest more speed after experts only came up with values of 7.3 and 5.9 percent respectively had expected. A first rate hike in March on the stock market is considered certain. Investors now estimate the probability of a significant increase of half a percentage point at almost 50 percent.
Lagarde: The eurozone is not comparable
Meanwhile, the President of the European Central Bank, Christine Lagarde, once again warned against hasty interest rate hikes in the euro zone. “If we act hastily now, the recovery of our economies could be significantly worse and jobs would be at risk,” said Lagarde to the “Redaktionsnetzwerk Deutschland”. However, the European Central Bank is taking preparatory steps. The pandemic emergency bond purchase program will end in March and the ECB will reduce the total volume of its net asset purchases.
Lagarde also stressed that the eurozone cannot be compared to other major economic areas. “The US economy is overheating while our economy is far from overheating,” she said. “That’s why we can – and must – proceed more cautiously. We don’t want to choke off the upswing.”