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Investors were bracing for more market volatility after a sharper-than-expected rise in consumer prices ramped up expectations for how aggressively the Federal Reserve will need to move as it fights to tame soaring inflation.

The prospect of a more hawkish Fed has been the main theme for markets this year, sending U.S. yields higher and stocks lower. The yield on the 10-year Treasury has now moved up some 50 basis points in 2022 alone as it hit 2% on Thursday, its highest level in two-and-a-half years.

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Thursday’s data, which showed U.S. consumer price index beating economists’ expectation to notch their biggest year-on-year increase since February 1982, is forcing investors to further recalibrate their portfolios to account for a Fed that may be more aggressive than expected.

Already, markets have almost completely priced in a 50 basis point rate increase in March, CME’s FedWatch tool showed Thursday afternoon, after St. Louis Federal Reserve Bank President James Bullard said he has become “dramatically” more hawkish in light of the inflation data and now supports a full percentage point of interest rate hikes by July 1.

The inflation trend “is worrisome for equity markets as it could mean a more aggressive Fed policy response,” Matt Peron, director of research at Janus Henderson Investors, wrote in emailed comments.

“Markets could remain choppy for the coming months until either inflation stabilizes or the market is comfortable that the Fed is doing enough, but not too much,” he said.

Reaction in markets to the consumer price data was swift. As yields shot higher, U.S. equities slumped, led by a drop for the tech-heavy Nasdaq, which is replete with stocks that are particularly pressured by higher yields. Stocks were volatile during the session, with the benchmark S&P 500 last down about 1.4% in afternoon trading.

Investors were particularly zeroing in on the Fed’s next policy meeting in mid-March. The central bank has already signaled it will hike interest rates at that meeting, but at issue for investors is whether that increase will be by an even steeper 50 basis points as opposed to 25 basis points. “This number re-emphasizes the sense of urgency for the Fed to act,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York. “The market is starting to price in a much more aggressive path of rate hikes.”

Following the CPI data, BofA Global Research analysts said they “remain comfortable with our hawkish call” for the Fed to hike seven times this year. “For the Fed, this report provides another wake-up call,” the BofA analysts said in a report. “Inflation is here and it continues to make its presence known everywhere.”

Rick Rieder, BlackRock’s chief investment officer of global fixed income, said in an emailed statement that Fed policy needs to adjust quickly, but not necessarily too much in total amount, “since this would create significant risk for markets and the economy.”

“While the time has come (or did months ago) to move policy persistently and aggressively away from overly accommodative conditions ... executing on this pivot is going to be a real challenge for policymakers,” Rieder said.

After swooning for most of January, stocks had been recovering more recently. The S&P 500 was last down about 5% year-to-date, while the Nasdaq is down more than 8% in 2022.

Investors will be keen for any more clues about the pace of inflation ahead of the March Fed meeting, including the next monthly U.S. jobs report.

February employment data “could be the key point as to whether the Fed gets more aggressive,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

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