The Week Ahead: As inflation simmers and interest rates rise, investors stew

The final datapoint to lock in the market's expectation for the Federal Reserve's next interest rate move comes on Tuesday in the week ahead.

February's consumer inflation number will cement predictions regarding how much the Fed will raise its target short-term interest rate when it meets on March 22. It also will give investors a decent indication of how much more the central bankers may be inclined to keep hiking interest rates.

As consumer inflation stays high, so will borrowing costs.

Inflation has been slowing, though remains stubbornly strong. Supply chains may be smoothed out, but pandemic government spending, global tensions and record low unemployment continue supporting higher-than-comfortable price trends. The deceleration of inflation late last year was a welcome sign. But prices sped up again in January. And the February data is expected to show more winter heat for prices.

The Federal Reserve Bank of Cleveland releases inflation forecasts each weekday. The bank's own research finds its model has been more accurate predicting headline inflation than those of professional forecasters. And it is anticipating February's CPI will mimic January's stronger than wanted month-over-month jump of a half percent.

At the beginning of this month, the market was expecting just a 0.25% interest rate hike later in March. One week later, the forecast by the CME FedWatch Tool flipped with the odds favoring a stronger half percent hike when the Fed's Open Market Committee meets.

That's the power of the bank's open mouth policy. Chairman Jerome Powell told Congress last week that his agency is "prepared to increase the pace of rate hikes" if the data points to it. There's no subtly in his pledge. Inflation that is not moving down toward the bank's target of 2% will keep the Fed tightening its monetary policy.

Recession talk quieted down earlier this year thanks to a strong fourth quarter gross domestic product report and a huge surprise jump in January of seasonally adjusted new jobs. Interestingly, according to Google Trends, the location with the highest Internet searches of recession is Washington, D.C., where the Federal Reserve Board meets every six weeks, and where the GOP House and President Joe Biden are going toe-to-toe over the debt limit as it approaches.

Another strong month of inflation does not guarantee a recession, but it will continue to test the Fed's resolve and investor's patience.