A fresh round of data on U.S. inflation upended financial markets on Friday, putting to rest any lingering hopes that the Federal Reserve could soon end or at least suspend its continued rate hikes.One of the biggest reasons for the reaction is that Friday’s data was based on the Fed’s own preferred gauge of inflation, known as the PCE or personal-consumption expenditures price index, which captures changes in the prices of goods and services purchased by consumers. It includes a more closely followed and less-volatile reading known as core PCE, which strips out food and energy prices; that core reading actually reaccelerated despite almost a full year of Fed rate hikes.The PCE data is just the latest sign that the Fed’s tightening efforts — which have taken the fed-funds rate to 4.5%-4.75% from almost zero since last March — haven’t been enough to do the trick, and that stock and bond investors may be caught in the same sell-everything turmoil that prevailed for much of 2022.
The risk that U.S. interest rates could rise above 5% by March, the highest level since 2006, briefly gained some traction after Friday’s data. Traders boosted the chances of a half-point-rate hike in March to as much as 42% from 27% a day ago, before pulling back on those odds as the day wore on. Meanwhile, the 2-year Treasury yield
climbed further into its highest level since July 2007. All three major U.S. stock indexes