Fed Chairman Jerome Powell gave his semi-annual report to Congress today. He was clear that further rate hikes are coming, given recent data that indicates persistent inflation in services and renewed concerns about the ultra-tight labor market. Financial markets reacted by raising their expectations of where the federal funds interest rate will peak this summer, at 5.75%.
You might ask "so what"? Well, these revised expectations of coming Fed policy caused financial investors to bid up short-term interest rates substantially later in the trading day, and in fact to a point where short rates were much higher than long-term interest rates. Such a "yield curve inversion" is often seen as an indicator of a pending recession.
We get another jobs report on Friday and CPI for February next Tuesday, which may tell us more about whether the recent upward pressure on prices is likely to continue.
The Fed has been raising rates at the most rapid pace since the early 1980s to slow demand and therefore take pressure off prices. The biggest effects so far have been on housing markets and manufacturing, with consumer spending still expanding at a moderate rate. The next meeting of the Fed's policymaking committee is March 22.
bg 2/7/2023
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