US inflation is running far hotter than even the Fed expected. Here’s what some of biggest banks and asset managers say about it.

• US inflation surged by 7.5% in January compared to the previous year, the most since 1982. 
• The jump beat Wall Street forecasts and investors are now preparing for a much faster rise in US rates.
• We list comments from some of the largest investment banks and asset managers on the rate outlook.

Inflation is running way ahead of where everyone, including the Federal Reserve, expected this year.  

Data on Thursday showed the consumer price index (CPI), which measures the price of everyday goods and services rose by 7.5% in January, the highest rate since 1982 and ahead of economist expectations for a rise of 7.3%.

The surging cost of energy, food, housing, and medical care among other factors are adding to the existing pressure from labor shortages, supply disruptions, and strong demand in the wake of the Covid-19 pandemic. 

Core CPI, which excludes volatile food and energy categories and is the Fed’s preferred means of measuring inflation, soared 6% in January from the previous year, also the highest since 1982 and above forecasts for 5.9%.

Investors quickly sold off riskier assets like stocks and cryptocurrencies and dumped short-dated bonds, sending the yield on the two-year Treasury note up by the most in one day since mid-2009.

The jump in inflation beat all market forecasts and weighed on the markets, with the S&P 500, Dow Jones, and Nasdaq opening lower on the news. 10 year US Treasury yields hit 2% for the first since 2019 while the dollar fell 0.15%.

The greater-than-expected surge has added more pressure on the Federal Reserve to raise interest rates and contain inflation and consumer demand. It’s also prompted investors to reassess how fast the central bank is likely to increase interest rates. 

Based on the CME Group’s FedWatch Tool, investors are attaching a 70% chance of a 50-basis point rise at the Fed’s next meeting in March. That’s up from around 34% a week ago. 

Some of the world’s biggest banks and asset managers weighed in on how Thursday’s data has changed the outlook for US rates. We list their comments below: 

Goldman Sachs 

Jay Hatzius, chief economist

“Following this morning’s strong CPI print, we are raising our Fed forecast to include seven consecutive 25-basis point rate hikes at each of the remaining FOMC meetings in 2022 (vs. five hikes in 2022 previously).  We continue to expect the FOMC to hike three more times at a gradual once-per-quarter pace in 2023Q1-Q3 and to reach the same terminal rate of 2.5-2.75%, but earlier. We see the arguments for a 50-basis point rate hike in March.  The level of the funds rate looks inappropriate, and the combination of very high inflation, hot wage growth, and high short-term inflation expectations means that concerns about falling into a wage-price spiral deserve to be taken seriously.” 

“So far, though, most Fed officials who have commented have opposed a 50-basis point hike in March. We therefore think that the more likely path is a longer series of 25-basis point bp hikes instead. St. Louis Fed President James Bullard became the first FOMC participant to call for a 50-basis point hike earlier today, and we would consider changing our forecast if other participants join him, especially if the market continues to price high odds of a 50-basis point move in March.”

JPMorgan Asset Management

Jai Malhi, global market strategist

“US inflation has consistently beaten expectations and today’s inflation release saw more of the same. This provides a significant challenge for the Fed as it aims to keep price increases under control while at the same time sustaining the economic expansion.”

 “High energy prices and supply issues are stoking inflation but these issues should eventually fade. Of greater concern is that wage pressures are building and the central bank will not want to risk a wage price spiral. Looking ahead though, real consumer spending on discretionary goods and services is likely to cool naturally, as higher energy costs begin to bite.”

“The bond market is currently suggesting that there is a good chance the Fed will hike rates more than five times by the end of the year. While today’s release will be uncomfortable reading for the Fed, the squeeze on real incomes suggests they can perhaps afford to be a little more patient than the market thinks.”

HSBC Private Banking and Wealth 

Willem Sels, Global Chief Investment Officer

“The consumer price index was expected to rise further in January, but it jumped even more than anticipated, and so the debate around inflation will rage on for now. What markets really want to know is when US inflation will peak, but this upward surprise again illustrates how difficult it is to accurately forecast inflation.” 

“The inflation debate is not settled, and we advocate three strategies in portfolios to deal with high inflation. First, we look for ‘quality’ stocks, companies with strong market positions that allow them to charge through higher input costs to their customers, so they can protect their margins.”

“Second, tech stocks can be vulnerable to higher rates, and hence we balance them with value-style stocks such as banks and energy stocks. And thirdly, we think investors need to expect continued volatility in markets until it is clear that inflation is coming down, and we manage this through disciplined portfolio diversification.”

PIMCO

Tiffany Wilding, North American Economist 

 “Regarding monetary policy, this print surely increases the probability of the Federal Reserve increasing rates by 50 basis points in March, and consistently the market pricing moved to a 50% probability. However, we still think the Fed would prefer to hike sequentially at every meeting, instead of a more abrupt adjustment.

Furthermore, if the credit card data that we use to forecast retail sales turns out to be right, the combination of the CPI and retail sales prints suggests that the ability to pass on further price adjustments may be waning. Nevertheless, this print will surely concern the Fed, and makes it tough for them to push back against market pricing. At a minimum, today’s data solidifies our expectation that the Fed will likely begin hiking rates at a once per meeting pace.”

Deutsche Bank

Chief strategist Jim Reid

“Indeed the 7.5% YoY print (vs 7.2% expected) even raised the small possibility of the first inter-meeting Fed rate hike since 1994, and before that since 1979. It also raises the risk that a recession might be increasingly difficult to avoid.

“Our US economists yesterday moved up their US Fed call to a 50-basis point hike in March plus five more 25-basis point hikes in 2022, a hike at all but the November meeting, and totalling 175 basis points in 2022. They also highlight the increasing risk of a 2023 or 2024 recession.”

“Clearly forward guidance is a useful tool when you have uncertainty but around regime change it can prove a nightmare. For several months we’ve had to wait patiently until March to start the fight against inflation when in previous eras, when every meeting would have been live, rates would have likely been hiked many meetings ago.”