Inflation data comes at key moment for Fed after bank failures, jobs data

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In the wake of the Silicon Valley Bank (SIVB) failure, investors will be closely monitoring what was seen earlier this month as the most important data point for the future of Federal Reserve policy — the February inflation report.

The closely watched Consumer Price Index (CPI) is expected to show a slight decline in consumer prices last month, with headline inflation projected to rise 6% from January’s 6.4% annualized from the previous year, according to Bloomberg estimates. Recession from profit.

A 6% increase in consumer prices would mark the slowest annual increase since September 2021.

Compared to the previous month, consumer prices are expected to rise 0.4% in February, down from the 0.5% monthly increase seen in the first month of the year.

On a “core” basis, which strips out the more volatile costs of food and gas, prices in February are expected to rise 0.4% over the previous month and 5.5% over the previous year, according to Bloomberg data .

Tuesday’s inflation data comes just over a week before the Fed’s next policy announcement, scheduled for March 22, at which investors now expect the central bank to raise interest rates by 25 basis points, or 0.25%.

“If the tangle of CPI and its sub-components turns out to be hotter than expected, the odds of a 50-basis point rate hike increase,” wrote Bob Schwartz, US economist at Oxford Economics. ,[Conversely]If this key inflation gauge shows more signs of cooling, Fed officials are likely to take a more cautious stance, keeping a 25-basis point rate hike short at the last meeting.

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As of mid-afternoon on Monday, markets are pricing in an ~80% chance the Fed will hike rates by 25 basis points with a ~25% chance the March 22 policy meeting leaves the Fed unchanged , According to data from CME Group,

Last week, investors saw a better chance of the Fed raising rates by 50 basis points this month after two days of Fed Chair Jerome Powell’s testimony that insisted interest rates were more likely than previously forecast. .

Developments in the banking sector during the past week have changed this outlook.

“The risk of a systemic disruption to the banking system is small, but the risk of provoking financial instability may encourage the Fed to opt for a smaller rate hike at the upcoming meeting,” Schwartz said. “The surprising 45 basis point decline in the Treasury 2-year yield on Thursday and Friday supports that possibility.”

Wall Street economists remain divided on the decision, with Goldman Sachs predicting the Fed will not raise rates. Bank of America, EY and Oxford Economics have argued in favor of an increase of 25 basis points.

The Fed, whose current benchmark interest rate target is 4.5%-4.75%, has raised rates by a cumulative 4.5% over the past year in an effort to tame inflation. Consumer prices peaked last summer, reaching a nearly 40-year high of 9.1%.

The Federal Reserve has raised interest rates a cumulative 4.5% over the past year in an effort to tame inflation as Fed Chair Jerome Powell remains committed to accommodative monetary policy.

The Fed’s focus on inflation and the labor market in policymaking will pose a unique challenge as the central bank uses its so-called “third mandate“Financial stability in the wake of three bank failures in the past week.

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The labor market also presents another complication for the central bank, including a February increase of 504,000 jobs in January’s non-farm payrolls. stronger than expected The Fed’s accommodative policy stance is unlikely to encourage an easing.

Rick Ridder, “The Fed needs to see more evidence of lower labor demand to read more confidently the impact of more restrictive monetary policy cutting into income, consumption demand and resulting inflation, and especially sticky-high services inflation.” ” BlackRock’s chief investment officer of global fixed income wrote in a note Friday.

Rieder said the collapse of the SVB further complicated next week’s decision, explaining: “In addition, the banking industry has been hit to the jaw recently, and markets have taken a risk based on the prospect of greater financial stability risks as a result.” But as the Fed adjusts to the price of hikes, we need to keep in mind that the Fed’s other informal mandate has been the maintenance of financial stability.”

Alexandra Canal is a entertainment and media reporter at Yahoo Finance. follow him on twitter @alliecanal8193 and email her at [email protected]

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