Inflation Data Causes Markets to Drop; Fed to Raise Rates on Wednesday

The Dow (-4.1%), NASDAQ (-5.5%), and S&P 500 (-4.7%) each fell sharply last week, marking the fourth time in the last five weeks the indices posted losses.  Most of these losses occurred on Tuesday, which was the worst day since the beginning of the pandemic and wiped out the prior week’s lofty gains.  Taxable and tax-free municipal bonds also lost about 1% for the week.

The 800-pound gorilla remains in the room and reared its head on Tuesday with the release of key inflation data – the Consumer Price Index (CPI).  The CPI report showed that inflation was 8.3% in August, higher than expected.  Worse yet, the core inflation (excluding food and energy) was 6.3%, and 0.6% higher than the prior month – both sets of data are bad.  Another key measure of inflation - the Producer Price Index (PPI) - was reported on Wednesday.  The PPI doesn’t garnish the same attention as the CPI, but it did indicate that inflation may be easing off its highs, which is good news.  Initial jobless claims were also fairly low, suggesting that the labor market remains strong.  Mortgage rates also climbed to 6.35% last week, the highest since 2008, which also puts additional pressure on inflation.

All this data provides the impetus for the Fed to continue to aggressively raise interest rates, with its next meeting occurring on Wednesday.  The Fed has two key mandates – price stability and job stability.  So long as the labor market is strong (which also causes inflationary pressure), then the Fed is less “concerned” about aggressively raising rates to combat inflation.  Most economists believe the Fed will raise rates by 0.75%, but some believe it could be as much as a full 1%.  If the Fed raises rates by 1% on Wednesday, it is likely that the markets will react negatively to the news.  No matter how you shake it, this week will likely be a bumpy ride.  Let’s just hope there are bumps and not a straight line downhill.

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