CPI & Fed Minutes – Although Both Are Backward-Looking, We Continue to See Mixed Inputs for Treasury Rates

The Federal Reserve’s January meeting minutes were released last week and highlighted the thought process behind the Committee’s decision to keep the policy rate unchanged. In general, there was agreement that developments since the December meeting had tightened financial conditions and increased both downside risks and uncertainty regarding the outlook for growth and inflation. A number of participants cited concerns about the potential economic drag created by slowing growth in China. The overall tone of the minutes was dovish and did nothing to reverse the collapse in the probability of another hike this year, which now stands at 6% for the March meeting and 44% for just one additional hike by the end of the year. Meanwhile, CPI for January was also released last week and showed some improvement at both the headline and core levels, as both beat consensus expectations. The 0.3% month/month increase in Core CPI was the largest in over 4 years, and the 2.2% core year/year growth made for the 3rd consecutive month at 2% or greater for this measure. The headline figure, which includes food and energy prices, was flat month/month, and showed a 1.4% year/year increase. Under the hood, an ongoing firmness in services inflation has been the driver of firming overall CPI. One aspect of the report that was on the softer side was the decline in the rate of year/year wage growth, which fell to 1.2% from an upwardly revised 1.7% growth rate in December. All in all, the CPI report should help to calm fears of deflation and a coming recession, but it does little to cause the FOMC to change its now cautious outlook for the economy.

Sources: Bloomberg, CRT & Barclay’s