Liz Ann Sonders, the chief investment strategist at Charles Schwab, thinks Wall Street is missing the point on inflation.
US inflation accelerated to 7.5% in January, the highest level in nearly 40 years, according to Labor Department data published Thursday. Sonders thinks the news could trigger another round of Wall Street’s latest “parlor game”: guessing how many times the Federal Reserve will hike interest rates this year as it tries to keep the economy from overheating. But Sonders argues that this strategy misses the forest for the trees. “We don’t know. Take the Fed at their word. They’re data dependent,” she told me. “They’re not on a pre-set course.”
When the previous batch of worrying inflation data arrived, investors began obsessing over whether the Fed — which had indicated it would raise rates three times this year — would actually move four times or more. Bank of America updated its forecast in late January to include seven hikes. Sonders said there’s two issues with this approach to debating where the market heads next.
No. 1️: The Fed has made extremely clear that it just doesn’t know yet, and plans to monitor the economy in real time. “Against a backdrop of elevated inflation and a strong labor market, our policy has been adapting to the evolving economic environment, and it will continue to do so,” Chair Jerome Powell said at a press conference following the central bank’s latest meeting in January.
No. 2: Remaining laser-focused on interest rate hikes ignores how the Fed plans to approach its massive bond-buying program, the other lever it’s pulled to stimulate growth. The central bank is still adding to its balance sheet, which has ballooned during the pandemic to almost $9 trillion. How quickly it decides to pivot into shrinking mode will have huge ramifications. “This is a totally new animal here,” Sonders said.