(Bloomberg) — Faster monthly core consumer prices are likely to strengthen the Federal Reserve’s determination to raise interest rates to fight inflation, though next week’s move comes amid ongoing concern about financial turmoil. But the decision will be a tough call.
Read the most from Bloomberg
The February consumer price index, excluding food and energy, rose 0.5% last month and 5.5% from a year earlier, according to data from the Bureau of Labor Statistics on Tuesday. Economists view the gauge as a better guide to underlying inflation than the headline measure. The CPI overall climbed 0.4% in February and 6% from a year earlier.
The challenge now for the Fed is how to prioritize still-high inflation with rising financial stability risks for the Silicon Valley bank to resolve. Authorities moved over the weekend to provide banks with a new backstop to protect uninsured depositors.
“This CPI print underscores how they don’t have the luxury of sitting and waiting,” said Derek Tang, an economist at LH Mayer/Monetary Policy Analytics in Washington. “The weekend intervention was meant to make room for continued monetary tightening to contain the financial crisis. That way, they don’t want to choose between financial and price stability.”
While banking stocks affected by the collapse of SVB are showing tentative signs of stability, Chairman Jerome Powell and his allies may worry that it is too early to tighten policy again, while the fallout of the failure is still difficult to judge. .
It’s also important to argue that the Fed’s aggressive 450 basis points of tightening over the past year is already straining the financial sector and SVB’s plight shows that the backlash of previous rate hikes is starting to bite.
“It’s a tough call for the Fed whether they decide to tighten with a quarter-point hike or stand pat,” said Cathy Bosjancic, chief economist at Nationwide Life Insurance Co. Were financial stress on Sunday, Fed officials may be persuaded to raise rates by 25 basis points.
Still, “inflation is no longer the Fed’s sole focus, as it now has to take into account financial stability and loan conditions,” she said.
What Bloomberg Economics Says…
“February’s CPI report shows that inflation is not disappearing quickly, and the need to compel the Fed to raise rates remains. A move of 25 basis points at the March FOMC meeting would be appropriate, followed by some And will be until the Fed reaches a terminal rate of 5.25%.”
– Anna Wong and Stuart Paul, economists
To read the full note, click here
Investors, who before the banking crisis had been betting on the possibility of a 50 basis-point hike at the Fed’s March 21-22 meeting, now hedge an option with the possibility of a 25 basis-point hike. The two-year Treasury yield, which largely reflects expected Fed policy over that period, rose more than 30 basis points to 4.37% on Tuesday.
Details of the price report were “not encouraging” for the Fed with core services inflation, excluding housing — Powell’s focus — accelerating, Neil Dutta, head of US economic research at Renaissance Macro Research LLC, wrote in a note to clients.
“Today’s CPI data is a reminder that the fight against inflation is far from over,” he wrote. He expects a 25 basis-point hike next week, noting that it would have been half a point if not for SVB.
Ethan Harris, head of global economics research at Bank of America Corp., said policymakers will return to hiking if the Fed is successful in preventing a widespread crisis and keeping it narrowly focused.
“We are in the midst of a stress event and so it is very difficult to predict where things are going,” he said on Bloomberg TV after the CPI report. “Our view is eventually ringfencing works and the Fed goes back to raising interest rates. After all, the Fed has to fight inflation eventually.”
Read the most from Bloomberg Businessweek
©2023 Bloomberg L.P.