Stocks were little changed on Friday morning as investors tried to determine the next step for the Federal Reserve amid the highest inflation in decades.
The S&P 500 rose by about 0.2% heading into the opening bell. The index slid by 1.8% on Thursday and the Nasdaq dropped 2.1%, as technology shares came under pressure while Treasury yields spiked. The benchmark 10-year yield drifted slightly lower after breaking above 2% for the first time since August 2019.
Stocks sold off and yields climbed after the Bureau of Labor Statistics' January Consumer Price Index(CPI) showed the biggest annual jump in inflation since 1982.
The surging 7.5% jump in prices escalated calls for the Federal Reserve to raise interest rates more aggressively than previously expected and begin rolling assets off its balance sheet, in moves that would curb liquidity in the financial system and dampen soaring consumer demand and prices. St. Louis Federal Reserve President James Bullard told Bloomberg News on Thursday he wanted to see interest rates be raised by a full percentage by July and start the Fed's balance sheet run-off process in the second quarter, in one of the most hawkish paths so far telegraphed by a Fed official.
"That's not out of the realm of possibility," David Spika, GuideStone Capital Management president, told Yahoo Finance Live on Thursday about Bullard's suggestion. "The Fed realizes they have to start moving. ... Consumers are getting killed with this inflation. The Fed has to move and has to move quickly if they want to rein this in."
"If you go back even to the end of the financial crisis, monetary policy has been the key factor in driving returns and really providing that 'Fed put' that really allowed investors to come in and buy the dip," he added. "Those days are behind us — particularly with the inflation we're seeing now — and the market does not like this. It's like a kid that has never been told 'no,' that is now being told no and is throwing a temper tantrum. This will continue."
And against the inflationary backdrop, others also increased their expectations for the number of rate hikes the Fed is likely to roll out this year. Deutsche Bank economists said Thursday they now expect two more quarter-point hikes than they had previously forecasted. With the upgrade, they now see a 50 basis point rate hike at the March Fed meeting, followed by 25 basis point hikes after each of the following meetings of the year except for in November. If realized, a half-point rate hike in March would mark the Fed's first increase of more than 25 basis points since 2000.
"I think investors have to ask themselves, do I want to hedge against inflation, or do I want to beat inflation? And so, I think things like gold are where you can hedge, but I think there are other areas where you can continue to outpace and see outsized gains relative to inflation," Jordan Jackson, JPMorgan Asset Management global market strategist,told Yahoo Finance Live on Thursday."I think that's things like equities, I do think commodity markets are relatively well-supported here as well. And so investors will need to get diversified in how they think about hedging and outpacing inflation at the current juncture."
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