Overview: Over the past week, investors remained focused on elevated levels of inflation and the resulting monetary policy tightening cycle from the Federal Reserve. Mortgage rates climbed to the highest levels since 2009 in the days leading up to Wednesday’s highly anticipated Fed meeting, and then improved a bit after the outcome was revealed.
As expected, the Fed raised the federal funds rate by 50-basis points and indicated that more increases are coming. Regarding the roughly $9 trillion in Treasuries and mortgage-backed securities (MBS) held by the Fed, the plans announced were in line with recent comments from Fed officials and matched investor expectations. The Fed will allow its holdings to decline by $47.5 billion per month for the next few months and then $95 billion per month beginning September 1. During the press conference following the meeting, Chair Powell essentially ruled out larger 75-basis point increases going forward. Investors have now priced in 50-basis point rate hikes for the next several Fed meetings.
The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed. In March, core PCE was 5.2% higher than a year ago, down from 5.3% last month, which was the highest annual rate since 1983. For comparison, readings were below 2% during the first three months of 2021. Investors will be watching closely to see how much inflationary pressures will decline as disruptions due to the pandemic and the conflict in Ukraine are resolved.
Gross domestic product (GDP) is the broadest measure of economic activity. During the first quarter, GDP fell at an annualized rate of 1.4%, well below the consensus forecast for an increase of 1%, and down from exceptional growth of 6.9% during the fourth quarter. This was the weakest reading since the spring of 2020 when the pandemic caused a partial shutdown of the economy. However, the shortfall was due to an unexpectedly large decline in inventories, which is viewed as a temporary factor. During the quarter, manufacturers were unable to produce enough goods due to supply chain disruptions, while demand remained solid. Investors expect that future sales will increase as more items become available, meaning that economic activity was simply delayed.
Core PCE (annual % change)
May 5 — Institute for Supply Management (ISM) Manufacturing Index
May 6 —Employment Report
May11 — Consumer Price Index (CPI)