US inflation remained hot enough to further complicate the path forward for the Federal Reserve as it grapples with three bank failures and broader concerns about financial stability.
The Consumer Price Index rose 6 percent year-on-year in February, after increasing 0.4 percent from the previous month. This is down from the annual pace of 6.4 percent recorded during January, although it is still high.
Excluding volatile food and energy prices, the “core” CPI rose another 0.5 percent in February, matching the previous month’s increase and slightly higher than the 0.4 percent monthly increase economists had expected. And on a year-over-year basis, it was up 5.5 percent, just 0.1 percentage point lower than January’s year-over-year pace.
The data, released on Tuesday by the Bureau of Labor Statistics, comes at a difficult moment for the Federal Reserve, which had to step in on Sunday evening to contain the fallout from the sudden failure of the Silicon Valley bank on Friday. A few days ago, the Silvergate crypto bank was shut down.
After a hectic weekend during which no buyer emerged to absorb the beleaguered tech lender – which was then taken over by the Federal Deposit Insurance Corporation – government authorities scrambled to put together a rescue package before Asian markets opened on Monday.
Not only have deposits fully guaranteed for account holders at SVB and Signature Bank, another bank shut down by regulators on Sunday, but the central bank unveiled a new lending facility to ensure “banks have the capacity to meet the needs of all depositors”.
The so-called Term Bank Financing Program, backed by $25 billion from the Treasury Department, provides loans of up to one year to lenders who pledge collateral, including US Treasury bonds and other “eligible assets,” that will be valued at par.
Despite these measures, shares of First Republic and other regional banks deemed vulnerable in the wake of SVB’s collapse fell sharply on Monday.
Against this backdrop, investors and economists rapidly changed their outlook on the path forward for the Federal Reserve, which only last week was toying with the idea of accelerating the pace of interest rate increases and opting for a half-point rate hike at its meeting. On March 21-22.
Speaking before Congress earlier this month, before the banking explosion, Chairman Jay Powell said the Fed would respond more aggressively with rate hikes if the data indicated a sustained recovery in economic momentum. He also warned at the time that the end point for the Fed’s monetary policy tightening campaign, known as the final interest rate, would likely need to be higher than the 5.1 percent level set by most officials at the end of 2022.
The inflation report is the latest in a series of important data releases that Powell said he will be watching to determine the size of the next interest rate hike. The latest was the February jobs report, which showed employers added 311,000 jobs last month, a slower pace than previously blown numbers but still much higher than what officials suggest is consistent with easing price pressures.
The Fed had already narrowed its tightening range to a more traditional quarter-point pace in February, after several moves of half and three-quarters of a point last year.
But in the wake of the bank fiascos — which also included the voluntary liquidation of cryptocurrency-focused lender Silvergate last week — Wall Street is divided over whether the Fed will proceed with another quarter-point rate hike or forgo a hike altogether. Expectations for the final interest rate, which at one point exceeded 5.5 percent, have also been revised downward.
In just one year, the central bank raised its benchmark policy rate from nearly zero to nearly 4.75 percent — an aggressive historical pace that some believe also contributed in part to SVB’s demise given its long-term fixed-rate bond holdings and shortages. To protect against high rates.
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