Fed Prepares for Meaningful Rate Increase as Producer Prices Soar
A rise in geopolitical tensions driven by the conflict between Russia and Ukraine would normally cause interest rates to fall as investors move capital into the safe havens of the bond market. However, skyrocketing inflation has been pushing rates higher as investors brace for the removal of emergency Fed accommodation.
Earlier today, the Producer Price Index, a measure of wholesale prices, rose 9.7% year-over-year, just shy of the record high in 2010. Economists had predicted a reading of 9.2%. Prices on goods have outpaced prices for services and wages throughout the pandemic era. Ultimately, higher pricing for business inputs has led to higher prices for consumers as well.
Late last week, a report showed that consumer prices in the U.S. accelerated to an annualized rate of 7.5% in January, a forty-year high. Even with volatile sectors like food and gas stripped out, so-called core inflation rose by 6% versus economists’ estimates of 5.9%.
Fed’s Bullard Concerned with Credibility
With runaway inflation posing an increasing risk to the post-pandemic economic rebound, St. Louis Federal Reserve President James Bullard stepped up the hawkish rhetoric during an interview on CNBC Monday morning. According to Bullard, “I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation. This is a lot of inflation.” Bullard stated in the interview that the Fed should hike rates by 100 basis points by July 1st, believing that the Fed’s “credibility is on the line.”
With rate markets focusing on inflation and the Fed, Fed futures currently show a nearly 60% chance of a 50bps hike at next month’s meeting, twice the traditional move. Treasury yields are up as well, with the yield on the benchmark 10-year note now above 2%, at 2.04%. Mortgage rates are on the rise as well, with the national average for 30-year rates now above 4%.*
Jeremy Collett is Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process.
*National average mortgage rates from FRED as of 02/15/22 and are not advertised rates from Rate, Inc."
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