February Monthly Dashboard: Growth and rapid inflation should prompt more restrictive Fed policy

Monthly Review (Page 2)

The impacts from the Omicron variant were less severe than expected with a strong pace of hiring and a surge in retail sales for January. Still, supply chain disruptions remain widespread and may have been exacerbated temporarily by the spike in Covid cases, resulting in slower growth of business activity and even higher inflation. With price gains at the fastest pace in 40 years, consumer sentiment plunged to a pandemic low while the Fed has signaled imminent rate tightening, with financial markets expecting significant moves, contributing to recent market volatility.

Outlook (Page 3)

The sustained surge in inflation is forcing a policy change by the Fed, with analysts now expecting the Fed to tighten by at least 100 bps in 2022 — and some looking for 175 bps. While inflation is expected to peak soon, annual readings should remain elevated into 2023 even if supply chains normalize over the next year as expected. The higher interest rates will help to slow demand and, thus, inflation, but much of the current price pressures are being driven by factors beyond the Fed’s influence (i.e., global shipping and energy) — adding uncertainty to the outlook.

Go deeper with the full February’s dashboard linked below.