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Markets are hearing, but not heeding, the Fed’s warnings. It can be costly for them.




Who should you believe, me or your own eyes? The ghost of Chico Marx appears to live on among bond traders, who continue to doubt the Federal Reserve’s decision to continue its inflation battle into 2024.

While the odds for another quarter-point increase in the target for federal funds at the Fed’s policy meeting on 2-3 May has been almost locked in, markets continue to price rate cuts in 2023’s second half. That is in contrast to the best guesses of Fed Chairman Jerome Powell and his colleagues that the key rate will end the year at 5.1%, implying no cut after the May increase.

The decision to stay the course was made despite Fed staff predicting a mild recession later this year, according to the minutes of the last policy meeting on 21[ads1]-22. March, which was released this week. In light of that, bond traders are still looking for the Fed to back down. But inflation has stopped improving, although it did not hit a four-decade peak last year. And consumers are not fooled by better figures from year to year as a result of the big 2022 jumps. They see price trends that show little improvement.

For example, consumer prices rose 5% over the past 12 months, the Bureau of Labor Statistics reported last week, down from the peak 9% year-over-year increase recorded in 2022. But core CPI, excluding food and energy costs , was still 5.6% above the level a year earlier, and rose at an annual clip of 5.1% over the past three months. Alternative measures, such as the Atlanta Fed’s core rates, rose at a 5.9% annualized pace over that stretch, not much slower than the 6.5% over the past 12 months.

Consumers see inflation rising, not falling, over the coming 12 months, no doubt due to the recent jump in energy costs. Figures from the University of Michigan, out on Friday, showed a jump in expected inflation for the year ahead to 4.6%, from 3.6% a month earlier. The New York Fed’s consumer survey found a similar rise in one-year inflation expectations, to 4.7% in March from 4.2% a month earlier.

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Additional meaningful insight into price trends should come during the corporate earnings reporting season, according to Ronald Temple, market strategist at Lazard Asset Management. While it may be too early to gauge the impact of the banking turmoil sparked by the failure of Silicon Valley Bank, the effects of the Fed’s year-long rate hike campaign should be evident in management’s conference calls, he says. Barron’s. Cost pressure is still high, but companies have less ability to pass through further price increases. This indicates slimmer profit margins.

Here’s how BCA’s editors answer the question of who to believe: no interest rate cuts with sustained inflation, while


The S&P 500 index

holds over 4,000, not far from Friday’s end. A relief would only come with a meaningful break at 3,500, they write in a strategy report. Sorry, Chico.

Write to Randall W. Forsyth at randall.forsyth@barrons.com



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