Fed Chair Powell Eyes ‘Restraint For Longer’ With Trump Tariffs Set To Boost Inflation; S&P 500 Pauses – Investor’s Business Daily
Source: Investor’s Business Daily
The consumer price index surprised on the upside in January, adding to inflation concerns engendered by Trump tariffs. The S&P 500 tumbled initially, but markets are staging a bit of a comeback, possibly because there’s some reason to take the CPI inflation data with a grain of salt.
Economists highlighted the tricky seasonal adjustment process for inflation at the start of the year, when companies often raise prices. The advice: Wait until February data before drawing conclusions on the inflation trend.
Still, an extended Federal Reserve pause is looking more likely as President Donald Trump fires off a barrage of new or expanded tariffs, including those announced Monday on steel and aluminum that have lifted Nucor (NUE) and Steel Dynamics (STLD).
Trump said Wednesday that he wants lowered interest rates to go “hand in hand” with tariff hikes.
Fed Chairman Jerome Powell, testifying before the Senate on Tuesday, said “policy restraint for longer” is likely, if the labor market remains solid yet inflation doesn’t keep falling toward 2%. The S&P 500 was little changed ahead of Wednesday’s consumer price index, following the latest escalation of Trump tariffs.
“The sharp increase in the core CPI is less alarming than it first appears,” wrote Samuel Tombs chief U.S. economist at Pantheon Macroeconomics.
Tombs highlighted “how disruptive the seasonal adjustment procedure can be at the turn of the year and how dangerous it is to extrapolate from one month’s data.”
He advises waiting until February to judge the inflation trend.
The 10-year Treasury yield jumped 11 basis points to 6.45%, a three-week high. That follows a recent pullback to around 6.4%.
The 0.4% core CPI increase looked even worse when not rounded to tenths of a percentage point. Rounded to thousandths, the increase was 0.446%.
On a 12-month basis, the increase to 3.3% was a bit overstated compared to the reading of 3.258%.
“Inflation has gotten sticky with items like used cars and auto insurance ticking back up,” wrote David Russell, global head of market strategy at TradeStation. “Investors may not react too aggressively yet because we get more data before the key dotplot in March,” which will show updated rate-cut projections from Fed policymakers. “But time could be running out for this bull market if we don’t see progress on inflation soon.”
Fed Chairman Jerome Powell will begin his second day of monetary policy testimony, appearing before the House Financial Services Committee at 10 a.m. ET. Powell may highlight seasonal adjustment issues that make January inflation data hard to gauge.
Markets are now pricing in less than 1% odds of a rate cut at the March 19 Fed meeting, according to CME Group’s FedWatch tool. Odds rise to just 12% for the May 7 meeting and 35% for the June 18 meeting.
Markets now don’t see the next rate cut until the Sept. 17 meeting, and even then the chances are just 56%.
The hot CPI reading came even as medical care services prices were flat on the month. However, the Fed’s primary inflation rate, the core PCE price index, uses PPI data for health services prices.
Hotel and motel prices jumped 1.7% on the month. Owners’ equivalent rent, the biggest part of the core CPI, rose 0.3%.
Transportation services prices jumped 1.8%.
S&P 500 futures fell 1.1% shortly after the hot CPI inflation report, signaling a move down to its 50-day moving average. The Nasdaq is set to open below that key level.
The 10-year Treasury yield jumped nine basis points to 4.63%.
The hot core CPI inflation reading came as core goods prices rose 0.3%, the highest since May 2023. Services prices also were hot, rising 0.5%.
The overall CPI rose 0.5% on the month, lifting the 12-month CPI inflation rate to 3% from 2.9%.
The core CPI rose 0.4%, above 0.3% forecasts. The 12-month core inflation rate unexpectedly ticked up to 3.3%, instead of easing to 3.1%.
The Fed’s primary inflation rate, the core PCE price index, gets about 70% of its composition from the CPI and close to 30% from the producer price index. Deutsche Bank economists expect that the core PCE price index for January, which won’t be released until Feb. 28, will ease to 2.6% from 2.8%. That’s partly because the core PCE price index jumped 0.5% in January 2024, making for an easy year-over-year comparison.
The core CPI rose a more moderate 0.4% in January 2024, which still presents room for improvement in Wednesday’s figure. Economists see a 0.3% monthly increase, according to Econoday. That could see the 12-month core CPI inflation rate dip to 3.1%.
Thursday’s PPI will include some important inputs into the core PCE price index, including its largest component, health care services prices.
Powell’s opening statement to the Senate in his semiannual monetary policy testimony highlighted the “uncertainties” the Fed faces as Trump rolls out an ambitious agenda of tax cuts, tariffs, deregulation and deportations. In a Dec. 18 news conference, Powell compared the Fed’s job to “driving on a foggy n
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