The December inflation report had some encouraging news. It showed that consumer prices trended lower for the month, but more importantly, it confirmed that overall prices have been trending lower for the past six months.
After the inflation report was released, traders quickly adjusted their outlook for what the Fed will do next. The bond market now anticipates short-term rates reaching a high of between 4.75% and 5% in 2023. Late last year, some feared that the “terminal” rate would be over 5%. Today, rates are between 4.25% and 4.5%.
Now the ball is in the Fed’s court. The Fed Governors need to determine how much further they need to go with higher interest rates, which have been used to slow the economy and tame inflation. After reviewing inflation and other economic data, if the Fed concludes that it’s time to pivot on monetary policy, that decision would be expected to influence both the stock and bond markets.
Interest rates are historically difficult to predict, despite the Fed’s hints, because the economic landscape is ever evolving. As always, we will stay abreast of the inflation and interest rate landscape. Our goal is to offer timely advice that we believe is in the best interest of your unique financial and investing plan.