Stocks rallied in early trading this week as investors weighed comments from Federal Reserve Chair Jerome Powell. During his nomination hearing before the Senate Banking Committee on Tuesday, Powell reiterated that policymakers would use their tools (primarily interest rates) to keep inflation from becoming “entrenched” in the U.S. In addition, Powell hinted that the central bank may start reducing its $8.8 trillion balance sheet as soon as this year. Meanwhile, inflation rose at its fastest pace in almost 40 years, with the headline consumer price index (CPI) climbing 7% in 2021. The core reading, ex-food and energy, rose 5.5%, the largest 12-month gain since June of 1982. The increase in the CPI was led by higher prices for shelter and used vehicles. Energy prices, which were a key driver of inflation through most of 2021, fell last month. The CPI inflation data supports expectations that the Fed will begin raising interest rates in March.

Meanwhile, the unemployment rate has now fallen below 4%, which is considered the full employment threshold by the Fed.  This means that as we stand today, three or even four interest rate hikes are probable for the year 2022, starting in March.  Also, markets could see the Fed starting to shrink the $8.8 trillion balance sheet soon after raising rates. In bonds, interest rates continued to hover near a two-year high, with the yield on the 10-year Treasury note trading around 1.74% mid-week.

Source: GSAM, Daily Upside, Bloomberg

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