Markets On Edge As Rise In Inflation Gets Fed Hawkish

On Wednesday, the US government released inflation statistics for last month and they showed a steep rise in inflation.  Specifically, the headline Consumer Price Index (CPI) rose to 2.4% on an annual basis.

The core rate of inflation also rose to 2.1% on an annual basis.  The Federal Reserve (Fed) keeps a close eye on this second measure.  That’s because it strips out the effects of volatile products like gas and food and is an accurate measure of inflation without a lot of noise.

Notably, this number is now above the Fed’s 2% inflation target.  Just as importantly, core inflation is trending higher.  Indeed, a strengthening labor market will continue to push consumption and core inflation higher.  And that’s assuming a trade war doesn’t spark a major boom in prices for consumer products.

Rise In Inflation Gets Fed Hawkish

The Fed has been waiting for inflation to rear its head since the end of last year.  However, inflation under-shot expectations and this allowed the Fed to be more dovish.  This dynamic is now coming to an end.

A rise in inflation is already starting to force the Fed to get hawkish.  The most recently released Fed meeting minutes showed that they expect the economy to firm further and inflation to rise in the coming months.  Moreover, a number of Fed members are already calling for the Fed to raise rates faster.

Most analysts still expect the Fed to keep rates steady in May.  But the Fed is expected to raise interest rates again come their June meeting.

This would open the possibility for a total of four interest rate increases this year.  That’s an increase from the Fed’s original projection of three and a firm signal to markets that the Fed is becoming increasingly hawkish.

Markets On Edge As Fed Gets Hawkish

The stock market’s most reliable ally over the last decade has been a dovish Fed.  Indeed, the Fed has done this by lowering interest rates to near zero and printing up vast sums of money.  Moreover, the Fed has avoided aggravating financial markets by pushing off tightening monetary policy.

Accordingly, a hawkish Fed is a sea change to many investors who have only known a pliant Federal Reserve.   That’s going to be a major problem for the stock market as investors digest an increasingly hawkish Fed that’s more concerned about rising inflation than market turmoil.

Investors need to beware and prepare for more volatility as the Fed gets more hawkish.  Moreover, the odds of a major market correction are growing by the day.


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Al Basoglu

I am a financial services professional with over a decade of experience in various roles. I've lived and worked abroad in 5 different countries while pursuing personal and professional challenges. My interests include markets, history and different cultures. I tend to weave all of my interest into my analysis and articles.