Inflation Concerns and Fed Policy Take Centre Stage

Source: FRED, Federal Reserve Bank of St. Louis

Consumer spending and personal income rose more than expected in January in the US, leaving investors wondering whether the Federal Reserve could raise interest rates for longer than expected.

 At their most recent meeting, in late January, Federal Reserve officials approved a 0.25 percentage point rate increase, smaller than expected and the smallest hike since this tightening cycle began in March last year.

This took the federal funds rate to a target range of 4.5%-4.75%.

The Fed said that while there were signs inflation was coming down, officials believed “ongoing” rate hikes would be necessary. The key rate remained “well above” the Fed’s 2% target, the minutes of the meeting said.

Since then, the Department of Commerce Friday released stronger-than-expected inflation data for January.

Core personal consumption expenditure, the Fed’s preferred measurement of inflation, was up 4.7% on the year. Consumers’ spending rose 1.8% on the month, the largest increase in nearly two years.

US stocks fell sharply after the data were published, with the major indices posting their biggest weekly losses so far this year. The S&P 500 was down 2.7%, its worst week since early December.

US Treasury Secretary Janet Yellen has acknowledged that inflation is a problem but has also expressed confidence in a "soft landing" for the economy.

 The Fed holds eight scheduled meetings a year, with its next set for March 21-22.