Fed Faces a Tense Decision on Interest Rates as Inflation Slows and Banking System Struggles
By The US Consumer Price Index (CPI) revealed on Tuesday that headline inflation rose 0.4% over last month and 6% over the prior year in February, a slowdown from January's 0.5% month-over-month increase and 6.4% annual gain.[0] Data from Bloomberg indicated that both measures were in line with what economists had expected.[1] The core Consumer Price Index (CPI), which does not take into account volatile food and energy prices, increased by 5.5% in February 2022 in comparison to the same month the year before.[2] Services inflation, a key area of focus for the Federal Reserve, ticked up 0.1 percentage points to 0.8% for the month and is up 8.1% year-over-year.[3]
The Fed has hiked interest rates by a cumulative 4.5% over the past year in an effort to quell inflation as Fed Chair Jerome Powell commits to aggressive monetary policy. This has driven up mortgages even as home prices go down, leading to high rent costs.[4] Energy costs have been steadily decreasing over the past few months, which has contributed to the slowing inflation.[5] From January, prices for fuel, gas, and electricity decreased by 0.6 percent.[4]
Last week, Jerome Powell, the Chairman of the Federal Reserve, announced to two congressional committees that the central bank is ready to raise rates higher than anticipations if inflation does not decrease. This sparked conjectures that the Fed might be preparing for a 0.5 percent raise the following week.[6] However, the recent bank failures and questions about what might come next have made the Fed's job a bit more precarious, and they now find themselves between a rock and a hard place where a pause in rate hikes would send a signal of heightened contagion concern from the Fed, while continued with rate hikes may perpetuate the contagion risk itself.[7]
At its meeting next week, the Federal Reserve will have to consider the volatility of the banking sector when determining interest rates.[8] While some experts predicted the Fed may accelerate the pace of rate hikes later this month, analysts at Goldman Sachs on Sunday said the firm “no longer expects” the Fed to hike interest rates this month.[9] Nomura, an investment bank, joined the group of people that were calling for no increase in the following week.[10] The Federal Reserve is yet to decide how it will address the issues facing the banking sector, but it will be compelled to act once the central bank's next policy meeting has ended on March 22.[10]
0. “Stock Market Today Posts Gains; Meta Platforms 7% Jumps On Job Cuts | Investor's Business Daily” Investor's Business Daily, 14 Mar. 2023, https://www.investors.com/market-trend/stock-market-today/stock-market-looks-for-bank-bargains-united-airlines-stock-sinks/
1. “Inflation: Consumer prices rise 6% over last year in February, slowest since Sept. 2021” Yahoo News, 14 Mar. 2023, https://news.yahoo.com/inflation-report-february-cpi-data-march-14-105141134.html
2. “Inflation fell for the eighth-straight month in February” CNN, 14 Mar. 2023, https://www.cnn.com/2023/03/14/economy/cpi-inflation-february/index.html
3. “Inflation drops to 6%, but housing costs remain high—and the Fed is still watching ‘supercore' inflation” CNBC, 14 Mar. 2023, https://www.cnbc.com/2023/03/14/inflation-drops-to-6-percent-in-february-2023.html
4. “The New Inflation Report Has Some Signs of Hope” The New Republic, 13 Mar. 2023, https://newrepublic.com/post/171130/bls-inflation-report-march-2023
5. “US financial stability trumps near-term inflation” ING Think, 14 Mar. 2023, https://think.ing.com/articles/us-financial-stability-trumps-near-term-inflation/
6. “Inflation gauge increased 0.4% in February, as expected and up 6% from a year ago” CNBC, 14 Mar. 2023, https://www.cnbc.com/2023/03/14/cpi-inflation-february-2023-.html
7. “February CPI Report: What the Experts Are Saying About Inflation” Kiplinger's Personal Finance, 14 Mar. 2023, https://www.kiplinger.com/cpi-report-inflation-fed-rate-hikes-prices
8. “The collapse of 2 lenders just made the Fed's inflation fight harder” NPR, 14 Mar. 2023, https://www.npr.org/2023/03/14/1163129029/the-fed-already-had-a-tough-inflation-fight-now-it-must-deal-with-banks-collapsi
9. “Inflation rose 6% in February as Fed mulls more rate hikes amid bank chaos” New York Post , 14 Mar. 2023, https://nypost.com/2023/03/14/inflation-rose-6-in-february-as-fed-mulls-more-rate-hikes
10. “Inflation Fell To 6% In February—But Some Experts Fear Banking Crisis Could Make Prices Worse” Forbes, 14 Mar. 2023, https://www.forbes.com/sites/jonathanponciano/2023/03/14/inflation-fell-to-6-in-february-but-some-experts-fear-banking-crisis-could-make-prices-worse
