4 Minute Read by (Reuters) – NEW YORK (Reuters) – The largest increase in consumer prices in 13 years has heightened investor emphasis on the Federal Reserve’s messaging, with the central bank’s chairman scheduled to testify before Congress on Wednesday. Showcase ( 3 images ) Stocks appeared to be mostly unfazed by June’s significant increase in consumer prices, with key indexes sliding lower as data showed inflation accelerating due to supply bottlenecks and a comeback in travel-related service charges. After a lackluster auction for the 30-year note, benchmark U.S. Treasuries sold down, with rates increasing. With Fed Chair Jerome Powell set to appear before Congress on Wednesday, many will be looking for signals that the central bank is reconsidering its stance on increasing consumer prices, which it has previously stated are temporary, and may start unwinding its easy-money policies sooner than expected. According to Michael Brown, senior analyst at Caxton in London, the statistics were “obviously an upside surprise.” “It will make Powell’s testimony on Capitol Hill tomorrow a much more difficult exercise than it would have been otherwise, because it will add to the ‘transitory’ narrative’s pressure.” The Federal Reserve’s monetary support has been important for markets, since the benchmark S&P 500 index has risen by more than 95% since March 2020. Any hints of a faster-than-expected unwinding of the Fed’s inflation-fighting policies, such as a slowdown of its bond-buying program, are likely to shock asset markets. Stocks wobbled last month when the central bank made a perceived hawkish shift, before indices pushed to new highs, while the benchmark 10-year Treasury rate fell. The consumer price index jumped 0.9 percent in June after rising 0.6 percent in May, potentially complicating assumptions that the economy is cooling sufficiently to prevent the Fed from unwinding faster. Treasury yields have been dragged down in recent weeks by expectations of a stalling recovery. They’ve also expedited the shift away from shares of economically vulnerable corporations like banks and energy companies and into high-growth technology-focused stocks, which have pushed markets higher for the past decade. According to a recent survey of fund managers conducted by BofA Global Research, 70% of fund managers believe the recent increase in inflation is temporary, while 26% feel it will persist longer. Indeed, some experts on Tuesday cited aspects of the CPI increase, such as a large jump from used car prices, as evidence that inflation could be temporary. “The report was disturbing,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management. “But nothing in the study was unexpected enough to shift the narrative.” “It appears that inflation pressure is still concentrated in particular categories linked to the reopening, such as secondhand vehicles, electricity, and hotel prices.” Powell will testify before a House of Representatives committee on Wednesday and a Senate panel on Thursday, ahead of the Federal Reserve’s next policy meeting on July 27-28. Investors are also looking forward to the Federal Reserve’s economic policy symposium in late August at Jackson Hole, Wyoming, to see if the central bank may hint a change. Following the issuance of the FOMC policy statement in June, “the market came around to the view that the Fed wouldn’t allow inflation to get out of hand,” according to Jack Janasiewicz, a strategist at Natixis Advisors. “The ‘don’t fight the Fed backdrop’ will be crucial in this situation. It’s difficult to be pessimistic on assets as long as it continues to supply liquidity.” In New York, Saqib Iqbal Ahmed, Karen Brettell, and Chuck Mikolajczak contributed additional reporting; Chizu Nomiyama edited the piece./n
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