Will the Fed keep raising rates?

On Tuesday, March 14, the Bureau of Labor Statistics (BLS) released its Consumer Price Index (CPI) report, which provides insight into the impact of inflation on American consumers.

The report indicates that, while still elevated, inflation is showing signs of easing. February's headline numbers were in line with expectations: Month-over-month, inflation rose 0.4%, while year-over-year inflation was up 6.0%; this is compared to a 0.5% month-over-month increase and a 6.4% year-over-year increase in January. Month-over-month core CPI, however, rose slightly, from 0.4% in January to 0.5% in February.*

Along with the slowing wage growth seen in last week's job's report and the turmoil surrounding the closure of Silicon Valley Bank, these inflation numbers will likely have many wondering whether the Federal Reserve will slow or cease hiking interest rates at its upcoming meeting on March 22.

What is the Consumer Price Index?

CPI tracks the average price level of a selection of goods and services that Americans consume. The report, which is released every month, breaks this down in 2 ways:

• By time frame. The change in average price is tracked month-over-month and year-over-year.
• With and without food and energy prices. Because food and energy prices are especially volatile, the report provides data that both includes and excludes them. The data that excludes them is referred to as "core CPI." The data that includes them is referred to as "headline CPI."

How much prices rise or fall from month-to-month is an indication of the rate of inflation that a typical consumer experiences. This is a general calculation, however, meant to represent the rate of inflation for the US as a whole; the actual rate of inflation consumers experience can vary depending on where they live.

Why does it matter?

When the average price for goods increases, we are experiencing inflation, which can impact how consumers behave, how businesses perform, and how markets react.

The rate of inflation also influences the setting of interest rates. Rising inflation may spur the Federal Reserve to raise interest rates in the hopes of stabilizing prices. Cooling inflation may allow the Fed to slow increases in the interest rate, or perhaps even lower them. Generally, the Federal Reserve targets a 2% inflation rate, which it believes will provide economic stability.

What does it mean?

"It's nice to see inflation coming down," says Naveen Malwal, institutional portfolio manager for Strategic Advisers, LLC, the investment manager for many of our clients who have a managed account. "But it does feel like it's coming down very gradually. We might get to an inflation number more in the 3% to 4% range by this summer, but it may take even longer."

"This is a story that we believe will continue to develop over the coming quarters," says Malwal. "It won't necessarily be a quick fix."

With regard to interest rates, Malwal feels that recent events likely won't change the Fed's approach.

"While there was some talk that the Fed might pull back from rate hikes because of what happened with Silicon Valley Bank, the government's response to that situation has helped provide confidence to investors that this may have been an isolated incident," says Malwal. "As things perhaps calm down, investors may now go back to focusing on the inflation narrative."

"Headline and core CPI have come down," he says, "but given that inflation is still at a high level, it seems likely that the Federal Reserve will continue to raise rates to fight it. Right now, the market consensus seems to be that we may see a 25-basis-point hike in the Fed's target rate at their upcoming meeting on March 22."