The markets are starting to realize just how hawkish the Fed is–and reckoning with higher-for-longer interest rates

The economic data suggests there is currently very little justification for a rate cut come March. Inflation came in higher than expected in December, the labor market remains as tight as a drum, and retail sales rose more than projected last month. Granted, much of this was driven by the festive season, and the annual January blues will almost certainly drive inflation and spending lower. However, this will likely be a short hiatus before a rebound later in the quarter. Overall, the economy is still running hot, and it is economic data that drives the FOMC’s monetary policy decisions.

Sticky core inflation will keep the Fed on its toes

Inflation in December surprised the market with a rise from 3.1% to 3.4%, while core inflation–the Fed’s preferred measure–rose 0.3% month-over-month (MoM) and 3.9% year-over-year (YoY). Our data reveals that over recent months, inflationary pressures have come primarily from the services sector, though December also saw an uptick in luxury goods purchases.

In turn, services inflation has been exacerbated by the tight labor market. Despite some talk of a softening of labor conditions, December’s unemployment rate remained ultra-low at 3.7%. Initial jobless claims have averaged just under 210,000 in recent weeks–well below historical averages. Indeed, we have not seen a single monthly decline in jobs since 2020.

At the same time, wage growth has sped up again, hitting a rate of 6.5% YoY in November, up from 5.7% in October, driven in part by pressure from unions. Higher wages, combined…