Hello, my name is Stephanie Aliaga. I am a research analyst at J.P. Morgan Asset Management and I wanted to share with you some of our thoughts around the Fed following the February CPI report and the evolving regional bank crisis.
In response to the failure of Silicon Valley Bank and fears about the broad impacts of excessive monetary tightening, investors have quickly reduced their expectations on Federal Reserve’s hawkishness. And what’s particularly unique about this situation is that, unlike other exogenous shocks, the Fed has never, in recent years, had to deal with both financial market panic and inflation running well above their target at the same time, complicating the Fed’s potential toolkit.
However, we do think the February CPI report this morning gives them enough cover to dial back the hawkishness at their meeting next week.
Headline CPI rose by 0.4% m/m and 0.5% m/m excluding food and energy, roughly in-line with expectations. While this pace is still well above one compatible with the Fed’s 2% inflation goal, we are seeing a consistent, even if gradual, moderation in price pressures. Inflation continues to be heavily dominated by shelter costs, which we know is a lagged reflection of rent inflation experienced last year, not of current inflation pressures. Elsewhere, core goods inflation was flat, medical care services were lower, and energy was lower. However, increases in airfares, hotel rates and restaurants will likely keep Chairman Powell’s preferred inflation measure, core services excluding shelter, firm month-over-month.
Overall, we think concerns about financial stability will take the forefront for the Fed right now and we expect a significant policy messaging pivot next week. While a 25 basis point hike is still likely, and priced into futures markets, we also wouldn’t rule out the possibility of the Fed deciding to, out of the abundance of caution, pause interest rates or at least signal a forthcoming end to a year of dramatic tightening.
For investors, this more moderate path to monetary policy will be a welcome development and should help boost market sentiment at time of heightened concerns and volatility.
Thank you for listening, and please stay tuned for more insights from our team on the evolving market developments, on our website jpmorganfunds.com/insights or by following our strategists on LinkedIn.
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