The possibility of a 2023 market rally ground to a halt last week amid an onslaught of unfortunate inflation and economic data that spooked investors and increased the likelihood that the Federal Reserve will continue its economically painful rate hikes campaign for longer than Wall Street hoped.
All major indexes notched their largest weekly losses of 2023 on Friday. The S&P 500 fell by 2.7%. The Dow Jones Industrial Average sank 3%, and the tech-heavy Nasdaq fell 3.3%.
What's happening: It appears that after months of steady decline, the pace of inflation is going sideways. January's Personal Consumption Expenditures price index -- the Fed's favored inflation gauge -- came in hotter than expected on Friday.
Prices rose a whopping 5.4% in January from a year earlier, the Commerce Department's Bureau of Economic Analysis reported. In December, prices rose 5.3% annually. In January alone, prices were up 0.6% from the prior month, a higher monthly gain from December's increase of 0.2%.
This inflationary crab walk is almost certainly causing Fed officials to rethink their policy.
A paper presented Friday at the Booth School of Business Monetary Policy Forum in New York argued that disinflation will likely be slower and more painful than markets anticipate.
"Significant disinflations induced by monetary policy tightening are associated with recessions," said the paper. "An 'immaculate disinflation' would be unprecedented." (Immaculate, in this instance, refers to the possibility of inflation falling quickly to the Fed's 2% goal without any serious economic damage).
Several Fed presidents, governors and top economists were on hand at the Booth School forum to discuss the paper and monetary policy on Friday. The majority of those speaking expressed deep concern about the stubbornness of inflation and general market reaction.
Inflation won't quit: Cleveland Fed President Loretta Mester said that while price growth has moderated from its recent high, the overall pace of inflation remains too high and could be more persistent than her colleagues currently anticipate.
"I anticipate further rate increases to reach a sufficiently restrictive level, then holding there for some, perhaps extended, time," echoed Boston Fed President Susan Collins at the conference.
Collins referred to inflation as "recalcitrant," a loaded million-dollar word that means uncooperative, or defiant to authority.
Fed Governor Philip Jefferson struck a more befuddled stance on Friday, observing that inflation continues to baffle economists. "The inflationary forces impinging on the US economy at present represent a complex mixture of temporary and more long-lasting elements that defy simple, parsimonious explanation," he said. Parsimonious being another million-dollar word for frugal.
Economists stressed that more pain lies ahead. "It's important that markets understand that 'no landing' is not an option," said Peter Hooper, vice chair of research at Deutsche Bank, an author of the report.
While recent data has signaled that the US economy remains strong, "by the time we get to the middle of this year we expect to see some bad news coming and the sooner the markets get that message the more helpful it will be to the Fed," he said.
The final word: Former Bank of England Governor Lord Mervyn King summed up what many were thinking on Friday: Given the complexity of the current monetary situation, he said, "I wouldn't want to give advice to any central banks about what we should do."
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