that the Fed will announce at its policy meeting next week that they will hold off on the next one or two rate hikes (despite receiving inflationary trend data) ...and that markets will rally in response. Let's see....
Traders seem certain Federal Reserve won't raise interest rates again this year
Some economists think market ignoring firmer core CPI
Bloomberg WASHINGTON (MarketWatch) — Turmoil in the stock market, falling oil prices and an uncertain outlook for the U.S. and global economy has convinced traders that Federal Reserve won't be able to deliver on its planned four rate hikes this year.
In fact, trading on fed futures contracts now suggests the market barely expects the Fed to hike only once this year after lift rates for the first time in almost ten years in December.
But some economists think the market is ignoring fresh data released Wednesday by the Labor Department, which shows that core inflation, minus volatile food and energy prices, is grinding higher.
While weak on the surface due to falling costs for food and gasoline, the December CPI report showed that core consumer prices accelerated to a 2.1% rate over the past year, the strongest annual rate since July 2012.
Read more: Inflation falls again in December, CPI finds
The year-over-year increase in core CPI has been rising for seven straight months.
Robert Brusca, chief economist at FAO Economics, said the rise in core CPI likely "hardens the Fed's resolve" to stick with its four-rate hike path.
"The Fed cannot control markets and now it has core prices in the 2% range for the CPI and still strong job growth. These are metrics to cause some [at the Fed] to stay the course," he said.
Ham Bandholz, chief U.S. economist at UniCredit Research, said investors should take market views on the future path of rates with a "grain of salt" because they may say more about the state of the stock market than the U.S. central bank.
Last September, Bandholz noted, traders in fed futures contracts delayed their expectations of the first Fed rate hike when the U.S. stock market swooned, only to reverse course and pencil in a December rate hike when financial markets recovered.
With the stock market turmoil, the data suggests "a strong labor market and inflation grinding higher," he said.
Pause next week
There is broad consensus among economists that the Fed will stand pat at its policy meeting next week.
All eyes will be on the statement issued next Wednesday to see if it contains any hints about March.
Bandholz thinks the Fed will be leery of making major changes. Instead the U.S. central bank will repeat that it "reasonably confident that inflation will rise, over the medium term, to its 2% target."
Any word changes would take a March rate hike off the table even thought the meeting is 2 months away, he noted.
Not all economists are worried about the rise in core CPI.
Richard Moody, chief economist at Regions Financial Corp., said there is less inflationary pressure in the economy than implied by core CPI inflation. He said rents account for almost half of core CPI and has been driving it higher.
Stephen Stanley, chief economist at Amherst Pierpont, said whether there is a pickup in inflation "is likely to be the single most important issue that determines the pace of Fed rate hikes in 2016."
Stanley said he expects there will be "a noticeable pickup in inflation this year" while the market mostly looks for little or no increase.
At the moment, the data are supportive of the market's view, "but it is a long year and it is just getting started," he said.
Posted by: sarah_oz@yahoo.com
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