The Federal Reserve’s Open Market Committee surprised no one with today’s vote to keep the benchmark federal funds rate in a range of 4.25%-4.5%. The mild surprise came in the revisions to the Dot Plot projections. The Fed continued to pencil in two interest rate cuts for 2025. Some investors had feared that the Fed would show it has moved to projecting just one cut in 2025.
I expect less drama than markets now fear from Wednesday’s meeting of the Federal Reserve’s interest-rate-setting Open Market Committee.
This morning’s report on Consumer Price Index (CPI) inflation came in better than expected by economists. On a monthly basis, the all-items or headline inflation rate rose just 0.2% last month. That’s lower than economists’ expectations and a drop from a large 0.5% increase in January. Core inflation, which strips out volatile food and energy prices, also rose just 0.2% on a monthly basis, down from a 0.4% rise in January. Core prices were up 3.1% for the year, an improvement from the prior month. Headline or all-items Consumer Price Index (CPI) inflation rose at a 2.8% annual rate in February. Three reasons not to feel astoundingly optimistic about these numbers.
We haven’t had a really severe bout of stagflation since the late 1970s and early 1980s–but suddenly that scenario of very slow growth with high unemployment but with high inflation too that prevents the Federal Reserve from just cutting interest rates get growth back on track is back on Wall Street’s worry list.
And really serious stagflation would be something to worry about. In 1980–just before the Federal Reserve created a deep recession and bear market to break the back of stagflation–inflation hit almost 14.5 and unemployment reached 7.5%
I see the beginning of two weeks of extraordinary volatility. Look what’s on deck.
President Donald Trump has ordered an investigation of copper imports in what is a first step toward potential tariffs on the metal. The move launches a process that Trump previously used to put tariffs on steel and aluminium, opening a new front in his trade war. We’re at the early stages in this effort but I think a copper tariff play is a reasonable buy right now–especially since coopper demand and copper prices are forecast to climb tariffs or no tariffs. The biggest winner would be Freeport-McMoRan (FCX), the largest producer of copper in the United States. I’ll adding shares of Freeport my Jubak Picks portfolio tomorrow, Thursday, February 27.
The Federal Reserve’s preferred inflation metric–due Friday–is expected to cool to the slowest pace since June. But while I think markets will cheer, it’s too soon to look for any change from the Federal Reserve on interest rate cuts. That will have to wait until April at least the the central bank will get a better idea of exactly what tariffs President Donald Trump will increase and by how much.
U.S. consumers’ expectations for long-term inflation rose to the highest rate in three decades, in February’s consumer sentiment survey from the University of Michigan. Consumers expect prices will climb at an annual rate of 3.5% over the next five to 10 years. The rate is the highest since 1995,
The two-year treasury breakeven rate–shorthand for what traders expect inflation to average over the following 24 months-now exceeds the 3% rise in January’s Consumer price Index (CPI). When the breakeven rate is below CPI, traders are in effect betting inflation will slow in the next two years. When breakeven rate is above the CPI, traders are betting inflation will accelerate.
U.S. wholesale prices rose in January by more than forecast on higher food and energy costs. The producer price index for final demand climbed 0.4% from a month earlier. The Bureau of Labor Statistics revised December’s calculations upward to show a 0.5% increase in December.
Bond traders pushed out bets for the next Federal Reserve interest-rate cut to December on today’s increase in the CPI inflation rate. Swap contracts linked to future Fed decisions had before today anticipated a rate cut by September. Today’s swap pricing implies just one quarter-point cut this year. The yield on benchmark 10-year Treasury closed the day up 9 basis points to 4.62%%. Two-year Treasury yields, more sensitive than longer-maturity debt to Fed rate moves, rose by 7 basis points to 4.35%. “How can anyone justify any rate cuts with such inflationary pressure?,” Roger Landucci, a partner at Alphamatrix Finance in Geneva, told Bloomberg.
