The odds of the U.S. Federal Reserve hiking its benchmark fed funds rate by 50 basis points in March are on the rise after the PCE Price Index showed the disinflation trend reversed in January.
The PCE Price Index for January rose 5.4% from a year ago, compared with a 5.3% increase in December. The January number was far stronger than economist forecasts of a 5.0% increase. The core rate, which excludes food and energy prices, rose 4.7% versus 4.6% in December and was higher than the estimated 4.3% growth.
On a monthly basis, the PCE Price Index gained 0.6% in January, up from 0.2% in December and against expectations for a 0.5% increase. The core rate also rose 0.6% in January, versus a 0.4% increase in December and forecasts for a 0.4% rise.
Risky assets fell following the report, with bitcoin (BTC) shedding about $200 to $23,730 and threatening to fall to $23,000, which would be its lowest level of this week. Nasdaq 100 futures were down 1.9%, and S&P 500 futures were lower by 1.4%.
In addition, crypto-related stocks are off sharply. Coinbase (COIN), MicroStrategy (MSTR) and Marathon Digital (MARA) are all lower by 5%-8%.
Though severely backward looking – this report is for January – the gauge of personal consumer expenditures remains the Fed's favored inflation indicator. Following the report, odds of a 50 basis point rate hike (as opposed to 25 basis points) at the Fed's next policy meeting in March are rising, with traders now nearly evenly split between the two choice, according to the CME's FedWatch tool. As recently as one month ago, there was roughly a 100% expectation of a 25 basis point move in March.
Though remaining elevated, inflation during late 2022 had been trending lower, with Fed Chairman Jerome Powell saying in January he was seeing signs of a disinflation trend. This report could call that into question.
"Inflation remains stubborn and sticky between 4%-5%," tweeted RSM Chief Economist Joe Brusuelas. "Service inflation continues to increase with goods disinflation cooling. [The] risk of a March 50 basis point hike [is] rising and we are clearing moving toward a 5.5% policy peak at a minimum."
(UPDATE Feb. 24, 2023 16:40 UTC) Adds information about crypto-related stocks.
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