Surging Inflation Puts the Fed in an Impossible Situation
The central bank may have no choice but to raise rates sharply and risk pushing the economy into a recession.
Inflation is accelerating at the fastest pace since the 1980s.
Photographer: Spencer Platt/Getty Images
There were no encouraging signs in the Labor Department’s report Thursday that showed the consumer price index surged a greater-than-forecast 7.5% in January from a year earlier, marking a fresh four-decade high. The gains were broad and deep, suggesting that inflation is becoming entrenched and potentially putting the Federal Reserve in a no-win situation.
Immediately after the release of the CPI report, the money markets priced in the possibility that the central bank will be forced to raise interest rates higher and faster than it has projected, including a 50-basis-point increase at policy makers’ March 15-16 meeting. Traders also now expect a full percentage point of increases by the end of July, according to Bloomberg News. Moreover, the difference between short- and long-term bond rates — better known as the yield curve — continued to collapse.