To Hike By 25 or 50 BPs?

The stock market and other financial markets were "spooked" by last week's US economic data, building in a greater degree of Fed tightening ahead.  Speculation of a 50 BP rate hike at the March FOMC Meeting, however, is premature.  Temporary factors exacerbated the strength seen in Employment, Retail Sales, Manufacturing Output and Inflation in January.  The markets' fears could abate if these data moderate, if not pull back, in February or March -- as will likely be the case at least for some of them.  

The markets will be looking for clues regarding Fed policy in this week's release of the January 31-February 1 FOMC Meeting's Minutes.  The Minutes, as well as the upcoming Semi-Annual Monetary Policy Report and Testimony, should reflect the the more moderate message of Fed Chair Powell's post-Meeting news conference -- which could prompt a relief bounce in stocks.  Although some Fed officials raised the possibility of a 50 BP hike in March last week, they were probably voicing their own, well-known hawkish, positions rather than the official view.  Nonetheless, having some officials make hawkish comments could be part of Fed strategy for the purpose of restraining financial markets.

A Moderation in Growth Likely, But...

The Claims data so far suggest a moderation in growth immediately ahead.  Both Initial and Continuing are above their January average in early February.  This is a mirror image of what happened last year, when low Unemployment Claims contradicted some weak spending data.  The Claims data were right then.

The real-side strength in January likely resulted in part from temporary factors, such as the warm winter and post-holiday-induced exaggeration by seasonal adjustment.  The effects of unusually warm, or cold/snowy, January's have tended to unwind in February and March.  So the weather's impact on Q1 GDP Growth is small.  With the warm weather continuing in February, though, the unwinding could be delayed to March-April.  If so, GDP Growth would likely slow in Q223.

Temporary factors are not the only reason why the economy so far has defied forecasts of recession.  Fiscal policy remains growth-supportive, with Social Security COLAs being the latest surge in transfer payments.  Also, military restocking and the return of manufacturing to the US from abroad are lifting economic activity. 

If evidence of a moderation accumulates over the next few weeks, a 25 BP hike at the March meeting may very well become the markets' consensus.  Nevertheless, expectations of an increase in the Fed funds rate's endpoint in the Fed's Central Tendency Forecasts (to be released at the meeting) will likely remain.    

A Lower February CPI?

A pullback in the February CPI is uncertain.  It will require start-of-year price hikes to be behind us.  But, bi-monthly sampling of some components will sustain these hikes to some extent in February.  There is some favorable news.  Weekly data so far point to a slowdown in Gasoline Prices.  And, a drop in piped gas prices remains a possibility, as they have not yet reflected the plunge in natural gas prices. But, wholesale data suggest a near-term end to the decline in Used Car Prices.  Whatever prints, the Fed appears to have a longer-term view of the slowing path for inflation.  So, hawkish rhetoric and a higher funds endpoint may be the response to another high CPI.