Deep Dive: This is how high interest rates might rise, and what could scare the Federal Reserve into a policy pivot

by | Oct 13, 2022 | Stock Market

The stock market’s reaction to the latest inflation report Thursday underlined just how confused and fearful investors are. The S&P 500
SPX,
+2.60%
plunged as much as 3% shortly after the open as the Consumer Price Index for September showed that inflation accelerated. Shortly before noon, stocks switched direction, and the benchmark index ended the day up 2.6% in one of the biggest reversals on record.

Nick Sargen, an economist at Fort Washington Investment Advisors with decades of experience at the U.S. Treasury, Federal Reserve and Wall Street banks, spoke with MarketWatch about unexpectedly higher inflation, his outlook for peak interest rates and the biggest risk to financial markets. The interview is edited for clarity and length. MarketWatch: What did you think of this morning’s CPI numbers? Sargen: I was expecting the year-over-year headline number would be coming down. It has not come down as much as I, and most other people, were expecting. My expectations have been that the year-over-year number would come down to about 7% by the end of the year. MarketWatch: That may still happen. Sargen: It is possible, but have you filled your gas tank? Two weeks ago, regular was down to $3.15. Now I refilled at $3.59 because of the OPEC+ effect. What we had going for us was a big price decline in gasoline. What people have underestimated is the services component, which is [showing unexpectedly high price increases]. Month-to-month, some measures, the volatile ones, were coming down, but the services component is going the other way. Some of it is the housing component. As mortgage rates rise, housing prices should be coming down. But the CPI is measuring the imputed rental rate. Core inflation is going to stay higher, longer — it is not only the price effect of homes, it is the mortgage effect times the price effect. That works t …

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