MONTHLY ECONOMIC UPDATE

Far From Over: Fed Continues to Battle Persistent Inflation

February 2023 Economic Update

February 16, 2023

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Public Trust Trading Desk

The Federal Reserve remains engaged in its ongoing battle with inflation. January’s CPI report of 6.4% came in higher than the expected level of 6.2%, heightening concerns that inflation may be more persistent than anticipated. While CPI has decreased by 0.1% since December 2022, the rate of deceleration has slowed to a more gradual pace. Prices rose by 0.5% in January 2023, the most in three months, signaling that the slowdown in key areas such as energy, food, and clothing may have stalled or even reversed by the end of 2022.

Another key indicator that the Fed will be keeping a close eye on is the labor market. The U.S. jobs market added a shocking 517,000 jobs in January, snapping a five-month period of declining jobs growth and sending the unemployment rate to a 53-year low of 3.4%. The state of the jobs market is critical to the Fed’s strategy as rising wages and consumer spending results in upwards pressure on inflation. Continued strength in the labor market raises hopes that a “soft landing” is possible, in which monetary policy is tightened while also avoiding a recession. While the economy is highly unlikely to tip into recession territory with such an incredibly strong labor market, this outcome is far from guaranteed and depends largely on the decisions of the Fed this year.

Overall, the most recent data suggest that interest rates are likely to remain higher and for longer than what was anticipated at the end of 2022. Looking forward, eyes are now turning to the Fed’s March meeting where rates are largely expected to rise by another quarter of a percentage point. Much of the focus is now shifting to the second half of 2023 and the key discussion around whether the Fed will begin to cut rates by the end of the year. While many had anticipated a rate cut by year’s end, last month’s data have added a degree of uncertainty to those predictions. Market expectations are now divided between a June pause and another quarter-point rate hike.

The Federal Reserve remains engaged in its ongoing battle with inflation. January’s CPI report of 6.4% came in higher than the expected level of 6.2%…

Current Economic Releases

DataPeriodValue
GDP QoQQ4 ’222.90%
US UnemploymentJan ’223.40%
ISM ManufacturingJan ’2247.4
PPI YoYDec ’229.00%
CPI YoYJan ’226.40%
Fed Funds TargetFeb 14, 2023 4.50% – 4.75%

Treasury Yields

Maturity02/13/2301/13/23Change
3-Month4.636%4.573%0.063%
6-Month4.923%4.772%0.151%
1-Year4.884%4.662%0.222%
2-Year4.518%4.232%0.285%
3-Year4.202%3.900%0.302%
5-Year3.910%3.611%0.300%
10-Year3.702%3.504%0.198%
30-Year3.773%3.610%0.163%

Agency Yields

Maturity02/13/2301/13/23Change
3-Month4.928%4.732%0.196%
6-Month4.926%4.728%0.198%
1-Year4.893%4.688%0.205%
2-Year4.647%4.342%0.305%
3-Year4.426%4.062%0.364%
5-Year4.131%3.772%0.359%

Commercial Paper (A1/P1)

Maturity02/13/2301/13/23Change
1-Month4.540%4.390%0.150%
3-Month4.800%4.700%0.100%
6-Month5.040%5.000%0.040%
9-Month5.170%5.100%0.070%

Disclaimer

Source: Bloomberg. Data as of February 14, 2023. Data unaudited. Information is obtained from third party sources that may or may not be verified. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. All comments and discussions presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Previous Monthly Reports

Battling Inflation: No Pain, No Gain

While the labor market remains strong, recent data suggests that it could be starting to cool. The labor market has proven resilient in this high-inflation economic environment…

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