Markets hear the Fed’s warnings, but don’t heed them. It could be costly for them.

Who will you believe me or your eyes? The specter of Chico Marx appears to be living among bond traders, who still doubt the Fed’s determination to continue its fight against inflation into 2024.

While the odds of another quarter-point increase in the federal funds target at the Fed’s policy meeting on May 2-3 are all but locked in, markets are keeping pricing in rate cuts in the second half of 2023. This is against Fed Chair Jerome Powell’s best guesses. and colleagues that the main policy rate will end the year at 5.1%, meaning no cuts after the May hike.

The decision to stay the course was made despite Fed staffers forecasting a mild recession later this year, according to minutes from the latest policy meeting on March 21-22, released last week. In light of this, bond traders are still looking for the Fed to step back. But inflation, while off a four-decade peak last year, has stopped improving. And consumers aren’t fooled by the jump-starting better annual numbers for 2022. They see price trends showing little improvement.

For example, consumer prices have shown a 5% increase in the last 12 months, the Bureau of Labor Statistics reported last week, down from a peak 9% year-over-year rise recorded in 2022. But the core CPI, excluding food and Energy costs were still 5.6% higher than the level a year earlier, and had risen 5.1% annually in the last three months. Alternative measures, such as the Federal Reserve Bank of Atlanta’s core “fixed rates,” rose at an annualized pace of 5.9% in this stretch, not much slower than the 6.5% rate in the past 12 months.

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Consumers see inflation going up, not down, in the next 12 months, no doubt because of the recent jump in energy costs. Figures from the University of Michigan, released Friday, showed a jump in expected inflation for next year to 4.6%, from 3.6% the previous month. the New York Federal Reserve Consumer Survey It found a similar rise in inflation expectations for one year, to 4.7% in March from 4.2% the previous month.

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Additional meaningful insights into price trends should come in the corporate earnings reporting season that’s just begun, according to Ronald Temple, chief market strategist at Lazard Asset Management. While it may be too early to gauge the effects of the banking turmoil caused by the Silicon Valley bank failure, the effects of the Fed’s year-long campaign of interest rate hikes should be evident in departmental conference calls, he says. Barron. Cost pressures remain high, but companies have less ability to go through more price increases. This indicates lower profit margins.

Here’s how the BCA Editorial Board answers the question of who to believe: No Fed rate cuts as inflation persists, whereas


S&P 500 index

It settles above 4,000, not far from Friday’s close. Easing will only come with a meaningful break of 3,500, they write in a strategy report. Sorry Chico.

write to Randall W. Forsyth at [email protected]

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