The Feds next round of CPI (or inflation) numbers will be announced on the 13th and they’re soon to be here. Ever since the Feds decision to authorize quantitative tightening in early March, markets have seen a drop in price because of anticipation of falling inflation. Interest rate hikes have allowed the central bank to “use their tools forcefully” to attack inflation, yet inflation has stayed stagnant even with back-to-back hikes of 75 basis points which haven’t been seen since 1994. The general public is getting worried about the current situation and the word recession is being thrown out from every stretch of the world. This round of CPI numbers in the US will be one of the most impactful numbers this year because it will lead the decision of whether the Fed has to be more aggressive when handling their interest rates or be able to let Americans take a breather with minimal increases in cost of goods.
Quantitative tightening is used by selling bonds to the open market in return for taking money out of the economy. This leads to the Fed taking out billions of dollars out of the economy at a time for months on end in order to increase the value of the dollar. While the price of the dollar is increasing, the central bank increases interest rates for commercial banks so that the price of overnight lending between these banks becomes exorbitant. Commercial banks are then able to not lose money by increasing interest rates for everyday citizens which incentivizes others to not spend as much money as they would have in the past. By slowing down the way people spend their money, the Fed is able to decrease inflation, furthermore leading to a stable economy with no long term bad monetary outlook. It’s the Fed’s job to keep the economy healthy at all means, even if there are people struggling to buy goods and services with interest rate hikes.
With two 75 basis point hikes most people are leaning to inflation going down significantly in the next coming days. While there is a high chance that inflation does go down because of these hikes, others are holding on to the fact that it may be possible inflation is still stable or even increases, leading to securities on the stock market to increase in price. Some signs that may point to a higher inflation number that could come out the next days is by looking at both the dollar index and the government bond yields. Over the past 6 weeks, 10 year government bond yields have increased going from 2.5% to 3.37% meaning that a large majority of bonds have been sold off with no interest rate hike happening while these bond yields have increased. In addition, the dollar index has went from 104.7 to a high of 110.7, this connotes that the price of the dollar when paired against a basket of other currencies is still rapidly increasing. Taking all this into consideration, it’s still very possible that the unexpected of inflation going higher can still be valid, especially when paired up with a short term increase in price of securities on the market.
