Tuesday, March 28, 2023
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After hot economic data, the big question is whether the Fed will return to 50 basis point rate hikes

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The economic data coming in over the last week has by and large been characterized by one word: hot.

U.S. nonfarm payrolls employment surged by 517,000. Retail sales jumped by 3%. Consumer and producer prices did decelerate on a year-over-year basis, but not by as much as forecast. After the PPI data, economists at Goldman Sachs added another quarter-point rate hike to their forecasts, so that they now see 25 basis point hikes in March, May and June, which would take the fed funds rate between 5.25% and 5.5%.

Regional Fed Presidents James Bullard and Loretta Mester stepped to the microphone on Thursday to say they wanted a 50 basis point rate hike last month, rather than the quarter-point the Fed opted for in a unanimous vote. (Bullard and Mester were on the outside looking in as they’re not voting Federal Open Market Committee members this year.)

Chris Turner, global head of markets at ING, says it might be too early to let hawkish views soar. “We think the better activity data is partly weather-related and had always thought that the next leg of the U.S. disinflation story would be in the second rather than the first quarter,” he said.

That January was unusually warm can be seen in data from the National Oceanic and Atmospheric Administration, which tracks what are called heating degree days, which just measures when the temperature falls below 65 degrees Fahrenheit. Compared to normal, there were 175 fewer heating degree days in January than usual, according to the NOAA data. Warmer-than-usual weather means, for example, more shopping, eating out and construction activity.

Tim Duy, chief U.S. economist at SGH Macro Advisers, says Fed officials haven’t explained very well why they wouldn’t just raise rates by a half point in March, as even then the fed funds rate would still be below the central bank’s anticipated terminal rate of 5.375%. “It clearly became more concerned with the risk of overtightening, and suddenly downplayed the need for higher unemployment. But it must be the case that recent data reduces the risk that the Fed was close to overtightening, and raises the risk it will soon again fall behind the curve,” says Duy.

The key data to answer the question whether the Fed will step up the pace of rate hikes will be answered in March, as both payrolls and consumer price indexes for February will be released before the next Fed decision.

“Fedspeak like [Thursday’s] will lead market participants toward a 50bp hike if incoming data follows the recent trend. If the Fed doesn’t want that, leadership needs to be explaining why it won’t happen, or [Chair Jerome] Powell will need to reset expectations ahead of the employment report,” said Duy.

The yield on the 2-year Treasury
was 4.69%, not far from the 52-week high of 4.73%. U.S. stock futures
were pointing to a lower start after a weak finish on Thursday, in which the S&P 500
lost 1.4%.

Credit: marketwatch.com

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