Hopes had been high in early February that with the Fed enacting a quarter-point interest rate hike, that moderated pace would repeat at the central bank’s next meeting.
In fact, according to the CME FedWatch Tool, the probability of a quarter-point hike was more than 96% in the days that followed, surprising critical economic data arrived, showing that the economy was far slowing down—from the labor market to consumer spending to some inflation metrics.
Federal Reserve Chairman Jerome Powell told the Senate Banking Committee in a hearing on Tuesday morning that the Fed is prepared to increase the pace of its rate hikes if those numbers continues.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” said Powell. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
And expectations quickly flip-flopped. Just past lunchtime Tuesday, the CME FedWatch Tool showed a 67.5% probability of a half-point hike at the upcoming March 21-22 meeting.
Chris Rupkey, chief economist of FwdBonds reacted thusly in a statement: “Powell hit the market right between the eyes saying if the economy is flying high and moving faster this year, then monetary policy will have to follow with faster and higher rates if they are going to have any chance at bringing inflation down.”
“The market heard the word ‘faster,’ he said, “and that was all they needed to price in a greater chance of a [50 basis point, or half-point] rate hike in two weeks.”
Rate hikes have had some impact on Pasadena home sales, meanwhile. According to RocketHomes.com, inventory has risen by 1.1%, with an increase of 15.8% in one-bedroom homes, and an additional increase of 20.5% in four-bedroom homes. The number of available two-bedroom homes has decreased 8.3%.
Overall, sales from January 2022 to January 2023 dropped 7.0%, with 25 homes sold at under the asking price and 20 sold more than the asking price. In January of 2023 alone, 47.2 % of homes were sold below asking prices.
At the same time, most economic data is showing that inflation has slowed recently, measuring a hopeful 6.4% in January after hitting a 40-year high of 9.1% in June. However, Powell and other Fed officials have cautioned that there’s a long “ways to go.”
Powell on Tuesday said the Fed is seeing some progress on inflation as a result of its nearly yearlong monetary tightening efforts; however, the closely watched index, described as “core services excluding housing” is showing little sign of disinflation, Powell said.
The category accounts for more than half of core consumer expenditures, Powell said.
“To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions,” he said.
As CNN Business reported, the Fed typically focuses on “core” metrics of inflation gauges because they strip out the influences of often volatile categories such as food and energy. Digging into core services and excluding the segment of shelter allows the central bank to see more of the direct impact of wage increases.
