Keep close eye on February Consumer Price Index to know Fed’s next move on interest rates

The final data point to lock in the market’s expectation for the Federal Reserve’s next interest-rate move comes on Tuesday.

February’s consumer inflation number will cement predictions regarding how much the Fed will raise its target short-term interest rate when it meets on March 22.

It also will give investors a decent indication of how much more the central bankers may be inclined to keep boosting interest rates. As long as consumer inflation stays high, borrowing costs will do the same.

Inflation has been slowing, though remains stubbornly strong. Supply chains may be smoothed, but pandemic government spending, global tensions and record low unemployment continue supporting higher-than-comfortable consumer price trends. The deceleration of inflation late last year was a welcome sign. Yet, prices sped up again in January. And the February data is expected to show more winter heat for prices.

The Federal Reserve Bank of Cleveland releases inflation forecasts each weekday. The bank’s own research finds its model has been more accurate predicting headline inflation than those of professional forecasters. And it is anticipating February’s Consumer Price Index will mirror January’s stronger than hoped month-over-month jump of a one-half of 1%.

At the beginning of this month, the market was expecting just a one-quarter of 1% rate hike later in March. One week later, the forecast by the CME FedWatch tool flipped with the odds favoring a stronger one-half of 1% hike when the Fed’s Open Market Committee meets.

That’s the power of the bank’s open-mouth policy. Chairman Jerome Powell told Congress last week his agency is “prepared to increase the pace of rate hikes” if the data points to it. There’s no subtlety in his pledge. Inflation that is not moving down toward the bank’s target of 2% will keep the Fed tightening its monetary policy.

Recession talk quieted earlier this year thanks to a strong fourth-quarter gross domestic product report and a huge surprise jump in January of seasonally-adjusted new jobs. Interestingly, according to Google Trends, the location with the highest Internet searches of recession is Washington, D.C., where the Federal Reserve Board meets every six weeks, and where the Republican-led House and President Joe Biden are going toe-to-toe over raising the U.S. debt limit. The deadline to do that approaches, so the country won’t default on its debts — a calamitous event that would send shock waves through the global economy if it happened..

Another strong month of inflation does not guarantee a recession, but will continue to test the Fed’s resolve and investors’ patience.

Tom Hudson is chief content officer at WAMU public radio station in Washington, D.C.