The inflation report thudded onto Wall Street along with a batch of other data painting a mixed picture of the economy.
Fewer workers applied for jobless benefits last week than expected, a sign that layoffs remain low across the economy. That’s good news for workers and another signal of strength for the job market, but the Fed worries it could also add upward pressure on inflation.
Other reports, meanwhile, showed an index of manufacturing activity in the mid-Atlantic region plunged this month, while homebuilders broke ground on fewer homes last month than economists expected.
Altogether, the reports added doubt to the hopes on Wall Street that the Federal Reserve could pull off the tightrope walk of slowing the economy just enough to stamp out inflation but not so much that it creates a severe recession.
The Fed has already hiked its key overnight rate up to a range of 4.50 per cent to 4.75 per cent, up from basically zero a year ago. It has said that it expects to push through a couple more increases before holding rates at a high level at least through the end of this year.
The strong recent reports on inflation and the job market have forced Wall Street to align its forecasts for rates closer to the Fed’s. Earlier this year, there was a wide disconnect between them. Investors were betting the Fed wouldn’t go as high as it was saying, while also holding out significant hopes for a cut to rates in the latter part of the year.
The fear now is that if inflation proves sticker than expected that the Fed will have to go beyond what it’s been prepping the market for.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in a speech Thursday that she saw “a compelling economic case” at the Fed’s meeting earlier this month to raise rates by double what it ended up doing. The Fed on Feb. 2 raised its key overnight rate by 0.25 percentage points, the latest downshift in its size of increases from earlier hikes of 0.50 and 0.75 points.
Some stocks on Wall Street were able to buck the overall downward trend after reporting stronger earnings for the latest quarter than expected. Networking giant Cisco Systems rose 6.3 per cent, and waste services company Republic Services gained 3.7 per cent, for example.
Big tech stocks were helping to lead the overall market lower, though, because they’re seen as some of the most vulnerable to higher interest rates. In earlier years, their stocks shot higher in part because of record-low interest rates.
A 1.4 per cent fall for Microsoft and 1.6 per cent drop for Nvidia were some of the heaviest weights on the S&P 500.
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