Markets fell as the personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, rose more than expected in January.
The bottom lineThe headline PCE index rose at three times December's pace. The Fed prefers the PCE as it measures behavior in consumers, rather than just prices. Egg prices, for example, may have risen 8.5% in January, but if no one is buying them because they were so ridiculously expensive, then they're just sitting on grocery store shelves and not really contributing to inflation. However, the increase in PCE indicates that consumers were— and more.
All that feverish inflation makes it almost certain that the Fed will continue hiking interest rates —possibly beyond its target of 5.25%, as the Fed's Mester told CNBC's Steve Liesman — and for longer. As you might expect, markets reacted badly to the news. The two-year Treasury yield climbed to a 16-year high of 4.814%. Both the Dow Jones Industrial Average and the S&P 500 dropped 1%, while the Nasdaq Composite sank 1.7%. It was the worst week for the major averages this year.
Some of those losses may not be entirely bad. Liz Ann Sonders, chief investment strategist at Charles Schwab, thinks that they're the markets skimming off speculative froth. But Jeffrey Roach, chief economist at LPL Financial, pointed out that underlying conditions are still turbulent. "Markets will likely stay choppy during these months where higher rates have yet to materially cool consumer spending," wrote Roach.
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