Record Single Day Drop in Rates After Inflation Comes in Cooler
Heading into this week, we knew that Thursday’s Consumer Price Index (CPI) would be critically important. It did not disappoint. CPI is one of two key inflation reports in the US. PCE (Personal Consumption Expenditures) is the other big index, but because CPI comes out 2 weeks earlier, it gets almost all of the market’s response. The response to Thursday’s CPI was record setting in at least one important way, and still astonishing in many others. Let’s talk about why. Why was this week’s CPI so important? First off, almost every CPI report has been important in 2022. No other economic report has caused more volatility for the bond market. Because bonds dictate interest rates, we can also say CPI has caused just as much volatility in the mortgage world. CPI is the king of economic data in 2022 because inflation is the dominant focus of the financial market and the Federal Reserve (aka “the Fed”). The Fed sets policies intended to keep inflation at a low, stable level. Runaway inflation causes the Fed to hike interest rates in order to slow down the demand side of the economy. In the post-pandemic environment where a good amount of inflation is thought to be driven by the SUPPLY side of the economy, that’s resulted in the Fed being particularly aggressive in trying to tamp down demand.