January’s hot inflation may mean the Federal Reserve boosts interest rates even faster

Published Thu, Feb 10 202210:36 AM ESTUpdated Thu, Feb 10 20223:08 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

January's inflation report rattled markets as investors weighed whether the Federal Reserve would take drastic measures to curb rising prices — including a half-percentage-point interest rate hike in March. The consumer price index for all items rose 0.6% in January on a monthly basis, or 7.5% year-over-year, well above Dow Jones' estimates of 0.4% and 7.2%, respectively. "This is burning inflation. It's broad based. It confirms for the Fed that variants are more inflationary than disinflationary, and they are behind the curve," said Diane Swonk, chief economist at Grant Thornton. Bond yields move opposite prices. The benchmark 10-year Treasury yield topped 2% for the first time since 2019. The tech sector slid, but major banks, like JPMorgan, were higher on expectations that a higher rate environment would help their profitability. Traders in the fed funds futures market immediately bet on the possibility of a 50 basis-point rate hike — or a half-percentage-point increase — from the Fed in March, rather than the quarter-point hike that had been expected by most economists. "It's quite a report. I don't think 50 basis points happens, but the market's got just about 50/50 between 25 and 50 basis points priced in," said Wells Fargo's Michael Schumacher. "People are really spooked." He noted that the fed funds futures market was now close to pricing in six rate hikes for this year, up from just over five. The two-year Treasury yield, which closely reflects the central bank's policy, rose to nearly 1.50%. "I wouldn't say it's unglued, but it's certainly pricing in a ton from the Fed," said Schumacher. "Inflation's not backing off." Forecast updates in light of the data Swonk said she changed her forecast to now include a half-point hike for March, after the 8:30 a.m. ET CPI report. "The problem is how much does the Fed have to move?" she said. "In theory, it's nice to say they can raise rates to tamp down inflation, but you're now trying to get a boiling pot down to tepid. That's a very hard thing to do without dumping a bunch of ice in it." Swonk said the hotter inflation trend could also make the Fed consider winding down its balance sheet . The central bank is holding nearly $9 trillion in assets. "Now how rapidly does the Fed allow its balance sheet to also run off? It would like to have short-term rates be the primary tool, but there's a set of tools," she said. "The real issue is can they