US consumer prices rise 6% in tough times for Fed amid SVB fallout

US inflation remained warm enough to complicate the way forward for the Federal Reserve, as it grapples with three bank failures and broader concerns about financial stability.

The consumer price index rose 6 per cent year-on-year in February, after an increase of 0.4 per cent from the previous month. That is a step down from the annual pace of 6.4 percent recorded in January, but still high.

Stripping out volatile food and energy prices, the “core” CPI climbed another 0.5 percent in February, matching last month̵[ads1]7;s increase and slightly higher than the 0.4 percent monthly increase economists had expected. On an annual basis, it rose by 5.5 per cent, just 0.1 percentage point less than January’s year-on-year.

The data, released by the Bureau of Labor Statistics on Tuesday, comes at a difficult moment for the Fed, which on Sunday night was forced to step in to contain the fallout from the abrupt failure of Silicon Valley Bank on Friday. Days before, the crypto bank Silvergate had shut down.

After a hectic weekend in which no buyer emerged to absorb the beleaguered technology lender – which was then taken over by the Federal Deposit Insurance Corporation – authorities rushed to assemble a bailout before Asian markets opened on Monday.

Not only were deposits guaranteed in full for account holders at SVB and Signature Bank, another lender shut down by regulators on Sunday, but the central bank unveiled a new lending facility to ensure “banks have the ability to meet the needs of all their depositors” .

The so-called Bank Term Funding program, which has been halted by $25 billion from the Treasury Department, offers loans of up to a year to lenders that post collateral, including U.S. Treasuries and other “eligible assets,” that will be valued at par.

Despite these measures, shares in First Republic and other regional banks perceived as vulnerable in the wake of SVB’s collapse fell sharply on Monday.

Against this backdrop, investors and economists have quickly shifted their views on the way forward for the Fed, which only last week toyed with the idea of ​​increasing the pace of rate hikes and opting for a half-point rate hike at its meeting. on March 21-22.

In a speech to Congress earlier this month, before the banking implosion, Chairman Jay Powell said the Fed would react more aggressively to raise interest rates if the data suggested a sustained decline 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, would likely have to be higher than the 5.1 percent level that most officials had pegged at the end of 2022.

The inflation report is the latest in a series of key data releases Powell said he would watch to determine the size of the next rate hike. Another was the February jobs report, which showed employers had added 311,000 jobs last month, a slower pace than the previous blowout numbers but still well above what officials indicate is in line with easing price pressures.

The Fed had already reduced the extent of its tightening to a more traditional quarter-point pace in February, after several half-point and three-quarter-point moves last year.

But in the wake of the bank failures — which also included the voluntary liquidation of crypto-focused lender Silvergate last week — Wall Street is divided over whether the Fed will go ahead with another quarter-point rate hike or forgo an increase altogether. Expectations for the terminal interest rate, which at one point peaked at 5.5 per cent, have also been adjusted downwards.

In just one year, the central bank has raised its benchmark policy rate from near zero to nearly 4.75 percent — a historically aggressive pace that some believe also contributed in part to SVB’s demise given its holdings of long-term fixed-rate bonds and the shortage. protection against rising interest rates.

Source link

Back to top button