The Bureau of Labor Statistics revealed on Tuesday that the latest consumer price index (CPI) increased by 0.2 percent during the month of February after remaining static in January, while the all items index increased 1.5 percent before seasonal adjustment. According to Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, the latest numbers could mean the Federal Reserve will be in no rush to shift from a rate pause.
“With headline CPI running at 1.5% year-over-year, core CPI softening slightly from last month, and core PCE still sub-2%, the Fed will be in no hurry to shift from its policy rate hike pause,” Rieder wrote in an email. “The key to why today’s report is interesting, but ultimately not that significant in terms of market disposition, is that the Fed is looking to see inflation expectations rise before even contemplating another rate increase, and expectations have fallen of late.”
“Finally, for clues to potential policy adjustment in the coming months, keep one eye trained closely on inflation expectations, one on the growth and employment landscape, and also keep watch for changes to financial conditions,” Rieder added.
2019 has seen U.S. equities bounce back after a volatility-laden fourth quarter in 2018, but traders are dialing back their inflation bets, which sends a message of skepticism that continued growth through 2019 is sustainable.
A mix of data regarding manufacturing, business confidence and consumer data have tempered growth prospects, which has prevented inflation from going past the 2 percent target the Federal Reserve set. 2018 marks the seventh year inflation hasn’t gone past this target.
Reider noted that “the key to why today’s report is interesting, but not that significant in terms of market disposition, is that the Fed is looking to see inflationary expectations rise before attempting another rate increase This Fed is willing to now let inflation, and inflationary expectations, move above its long-term target, as there is a need to see inflationary expectations move higher from here, while the near-term data suggests that prices are likely to move in the other direction, with decelerating inflation prints through mid-year.”
“Patience” has been a mainstay in Fedspeak as of late and in January, the central bank elected to keep the federal funds rate unchanged, saying that it will be patient moving forward with respect to further rate adjustments.
January’s decision to keep rates flat came as the Fed didn’t show much dynamism in 2018, obstinately sticking with a rate-hiking measure with four increases in the federal funds rate. That appears to have changed given the current economic landscape, and especially in the capital markets as Fed Chair Jerome Powell is now preaching patience and adaptability–that will likely continue to be the case moving forward.
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