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The Inflation Battle is Not Over Chart


The Inflation Battle is Not Over

The Fed’s most aggressive rate hiking cycle in 40 years has not been enough to tame prices.


February 27, 2023


As Federal Reserve Chair Jerome Powell suspected all along, disinflation is hard work. After five months of decline, the Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index (PCE), ticked up 0.1% to 4.7% compared to a year ago, surpassing estimates for a 4.3% rise.


The small reversal in the disinflationary trend is a big blow to market expectations that rising prices were behind us. Breakeven inflation, a proxy for the market’s inflation estimate over the next two years, has risen back above 3% for the first time since August, which is 1% higher than where it was before news of January’s blowout employment report.


The futures market for the federal funds rate is now pricing in another 75-basis points of rate hikes, and markets are no longer pricing in a rate cut by the Fed later this year. Futures contracts now imply a 5.4% peak rate by August, up from 4.88% at the beginning of February, and for rates to remain unchanged through year-end. 


We think markets remain vulnerable to higher rates, particularly as the 10-year Treasury yield hovers near 4%. This means volatility may persist in equities until it becomes clear that inflation is consistently moving down to the Fed’s 2% target.








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