Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Lions and Tigers and Inflation! Oh My!

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Lions and Tigers and Inflation! Oh My!

Article excerpt

Last week's inflation news sparked concerns that the Federal Reserve might have to be more aggressive about raising interest rates in order to prevent the economy from overheating.

The initial reaction Wednesday to the Consumer Price Index jumping 0.5 percent in January was a sharp early selloff on Wall Street and mounting concern that the Fed might have to increase rates four times this year instead of the three times most market pundits had been forecasting.

Those fears subsided as the day wore on, with the S&P 500 gaining more than 1 percent and rates on benchmark 10-year U.S. Treasuries moving above 2.9 percent.

For R.J. Gallo, Federated Investors senior portfolio manager, inflation is behaving just the way the Fed forecast it would, given its plan to gradually raise short-term interest rates. Many investors have had a hard time accepting that, he said.

"In September, the market didn't expect the Fed would do what it said it would do with interest rates," Mr. Gallo said. "The market was very skeptical on the inflation front."

In September, 10-year Treasuries yielded just over 2 percent. Mr. Gallo attributed the higher rates since then to stronger economic growth in the U.S. and globally.

"It makes sense that interest rates should be rising," he said.

Tax cuts, the spending plan approved by Congress and President Donald Trump's proposed budget are also fueling worries on the inflation and interest rate fronts. Combined, the three measures are expected to spur economic growth, increase federal spending and decrease federal tax revenue. Many fret that's a formula for sparking inflation, escalating the federal budget deficit and spurring interest rates higher.

"Unfortunately, it doesn't seem like fiscal discipline is in favor in Washington," Mr. Gallo said.

However, he believes there are enough deflationary pressures at work to make interest rates move higher "in a reasonably controlled way."

"We're going to test 3 percent [on 10-year Treasuries] sometime soon," he said.

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