More investors bet inflation is here to stay amid disappointing price data

More investors are projecting a “no landing” scenario where inflation remains elevated but economic growth continues at its current levels following a disappointing inflation report on Tuesday, according to Reuters.

Nearly one out of five fund managers polled by Bank of America predicted a “no landing” scenario as the most likely outcome in the next year, with concerns about such a scenario being intensified by a poor inflation reading that sent U.S. markets into a frenzy on Tuesday, according to Reuters. Tuesday’s consumer price index (CPI) report showed inflation decelerated in January to 3.1% year-over-year from 3.4% in the preceding month, higher than expectations of 2.9%.

The poor report may have dashed investor hopes of a rate cut to the federal funds rate in the next few Federal Open Market Committee meetings, with the odds dropping to one out of ten that the rate will be cut in March, split in May, and more likely than not in June, according to Reuters. Investor futures are now betting on a drop in the federal funds rate of 0.92% in 2024 rather than the 1.5% prediction that was judged the most likely a month ago.

National financial conditions revised data show slight tightening after macro adjustments, but still way looser than historic average; the contributions is noteworthy in that the 5 components which traditionally are biggest contributors are seriously outweighed by misc. factors: pic.twitter.com/4gyN9SvSkh

— E.J. Antoni, Ph.D. (@RealEJAntoni) February 14, 2024

The federal funds rate is currently in a range of 5.25% and 5.50%, the highest rate in 23 years, in an effort to slow down the economy and reduce sky-high inflation with tight credit conditions. Inflation peaked at 9.1% in June 2022 and has not declined below 3.0% year-over-year since.

The Dow Jones Industrial Average had its worst day of trading since March 2023 after the index dropped more than 500 points, or 1.35%, in the wake of the CPI report. The Nasdaq fell 1.80% while the S&P declined 1.37% by the end of the day.

Economic growth has remained above trend in recent quarters, rising 3.3% in the fourth quarter and 4.9% in the third quarter of 2023, discouraging the Fed from cutting rates as a sign the economy is still running hot and fueling inflation.

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