US inflation is still slowing, but it isn’t going away as quickly as many may have hoped. Consumer prices in January reflected an inflation rate 6.4%, higher than expected and only slightly less from 6.5% in December. Markets were hoping for 6.2% reading and the most optimistic investors were looking for < 6% reading.

The stock market did not take the news kindly with S&P 500 concluding its second straight weekly decline. Mixed messages from the Fed and economists continue to roil the markets. Bank of Richmond Fed President Thomas Barkin said he favors a quarter-point move to give the central bank flexibility, and Fed Governor Michelle Bowman said the central bank should keep raising rates until there is much more progress on inflation. Former Treasury Secretary Lawrence Summers and economist Mohamed El-Erian warned an aggressive Fed risks damaging the economy.

Future Wealth’s View

Last week, markets were acting like everything’s fine, but everything isn’t fine. The Fed’s next interest rate announcement is slated for March 22. The expectation is that the central bank will deliver quarter-point hikes at its next two meetings and then hold top interest rates at 5.25% for the rest of the year. But, we believe, with inflation remaining sticky, a 50 bps hike in interest rates in March is a possibility and could surprise the markets once again.

Just last week, in our report titled “Victory over inflation may be premature”, we had stated that “The Fed is not done tightening and investors would be wise not to celebrate yet.” Link to the report is here –

In the meantime, the most reliable recession indicator, the spread between the three-month and 10-year Treasury yields, is blaring louder than ever. But, no one seems to care because the thinking is that a Fed-induced recessions should have Fed-induced recoveries. And the Fed itself seems to be echoing this sentiment and investors seem to be pinning their hopes of easing central bank policy in the near future.

While the members of the Fed may do well to duct tape their mouths between meetings, that is too much to ask. That said, with TIPS yielding 8%, Munis and Govt Treasuries approaching 5% yield and 9 month CDs climbing to 4.8% interest rate, there is little reason for investors to take big risks in the stock market other than to invest in stable value stocks that provide a healthy dividend.

As we often tell our kids – “Patience is a virtue”.