Inflation hits new high as rate hike discussions intensify
Summary
In response to persistent inflation, Federal Reserve officials hinted at an accelerated timeline for rate hikes and other tightening measures. COVID-19 impacts are also persistent, with the U.S. continuing to see close to one million new cases per day.
Inflation
The latest CPI reading, for the month of December, showed a 7% year-over-year increase in prices, slightly below the expected 7.1%, but higher than November’s 6.8% reading. The rate of month-over-month price changes also increased, at 0.5% for December compared to 0.4% for November. The annual reading was the highest since 1982.
Monetary policy: path forward
Federal Reserve Chair Jerome Powell testified before the U.S. Senate Committee on Banking last Tuesday, where he provided additional details on the path forward for the Fed. In addition to anticipating multiple rate hikes in 2022, with the first coming as soon as March, he suggested that the Fed may begin to unwind its balance sheet in the second half of the year, saying: “At some point perhaps later this year we will start to allow the balance sheet to run off, and that’s just the road to normalizing policy.”
Other Fed officials echoed Powell’s hawkish sentiment, with Fed Governor Lael Brainard implying that rate hikes will begin as soon as asset purchases have fully tapered, and Governor Christopher Waller suggesting there could be as many as five rate hikes by the end of this year. As those rate hikes take effect, corporates with unhedged floating-rate debt may see material increases in interest expense from period to period. For a more detailed look at the hedging strategies you can use to prevent such increases, register for our upcoming webinar.
Omicron threatens supply chains
China responded to recent Omicron breakouts in the port cities of Dalian and Tianjin with severe lockdown measures, as it tries to curb the virus ahead of the Chinese New Year and beginning of the Winter Olympics. The lockdowns put significant pressure on neighboring port cities, including Shanghai, and may represent the latest in a series of supply chain disruptions that put upward pressure on commodity prices and inflation.
In other commodity news, natural gas prices jumped almost 15% last week in response to forecasts for especially cold weather in the northeastern United States during the last week of January. Oil prices have been trending upwards as well, with WTI surpassing $85/bbl to start the week.
The week ahead
On the data front, the empire state manufacturing index will provide some insight into recent production trends this morning, followed by a slew of housing data later in the week. Markets will also pay close attention to any public comments from Federal Reserve officials as the next FOMC meeting (Jan 25-26) draws nearer.
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Disclaimers
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