US inflation has remained high enough to further complicate the path ahead for the Federal Reserve as it grapples with three bank failures and broader financial stability concerns.
The consumer price index rose 6% year-on-year in February, after rising 0.4% from the previous month. This is down from the 6.4% annual pace recorded in January, although still high.
Excluding volatile food and energy prices, the “core” CPI rose another 0.5% in February, matching the previous month’s increase and slightly higher than the monthly increase of 0.4 % that economists had predicted. On an annual basis, it rose 5.5%, only 0.1 percentage points less than the annual pace in January.
The data, released by the Bureau of Labor Statistics on Tuesday, comes at a delicate time for the Fed, which was forced to intervene Sunday night to contain the fallout from the abrupt collapse of Silicon Valley Bank on Friday. A few days earlier, the crypto-bank Silvergate had closed its doors.
After a frenetic weekend in which no buyers emerged to absorb the embattled tech lender – which by then had been taken over by the Federal Deposit Insurance Corporation – government authorities scrambled to put a plan in place. bailout before Asian markets open on Monday.
Not only were deposits fully secured for account holders at SVB and Signature Bank, another lender that was shut down by regulators on Sunday, but the central bank unveiled a new lending facility to ensure that “banks have the capacity to meet the needs of all their depositors”.
The so-called Bank Term Funding Program, which is backed by $25 billion from the Treasury Department, offers loans for up to one year to lenders who pledge collateral, including US Treasury bills and bonds. other “eligible assets”, which will be valued at par.
Despite the moves, shares of First Republic and other regional banks seen as vulnerable in the wake of SVB’s collapse fell sharply on Monday.
Against this backdrop, investors and economists quickly changed their outlook on the way forward for the Fed, which last week toyed with the idea of accelerating the pace of its interest rate hikes and opted for a hike in rate of half a point at its meeting. March 21 and 22.
Speaking to Congress earlier this month, ahead of the banking blast, Chairman Jay Powell said the Fed would react more aggressively to raise rates if data suggested a sustained rebound in economic momentum. He also warned at the time that the end point of the Fed’s monetary tightening campaign, known as the terminal rate, is likely to be higher than the 5.1% level that most officials had forecast at the start. end of 2022.
The inflation report is the latest in a series of important data releases. Powell said he would monitor the magnitude of the next rate hike. Another was the February jobs report, which showed employers added 311,000 jobs last month, a slower pace than previous figures but still well above what officials say, which is in line easing price pressures.
The Fed had already reduced the extent of its tightening to a more traditional quarter-point pace in February, following several half-point and three-quarter-point moves last year.
But in the wake of bank failures — which also included the voluntary liquidation of crypto lender Silvergate last week — Wall Street is split on whether the Fed will make another quarter-point rate hike or back off. completely to an increase. Expectations for the terminal rate, which at one point exceeded 5.5%, were also revised down.
In just one year, the central bank raised its benchmark rate from near zero to nearly 4.75% – a historically aggressive pace that some say also contributed in part to SVB’s demise given its holdings in long-term fixed rate bonds and the lack of protection against rising rates.