Consumer price rises in the United States slowed marginally from January to February, but the pace of inflation remained high, offering a challenge to the Federal Reserve at a critical juncture in the financial system.
According to the government, prices rose 0.4% last month, just 0.5% less than in January. However, removing volatile food and energy costs, core prices grew 0.5% in February, somewhat higher than the 0.4% increase in January. The Fed places a premium on the core measure as an indication of underlying inflationary pressures.
Despite the fact that prices are growing considerably faster than the Fed would like, some analysts believe the Fed will cease its year-long streak of interest rate hikes when it meets next week. With the failure of two large banks since Friday increasing concern about other regional banks, the Fed may prioritise rebuilding financial system trust over taming inflation for the time being.
This is a significant turnaround from only a week ago, when Fed Chair Jerome Powell told a Senate committee that if inflation did not moderate, the Fed may raise its benchmark interest rate by a significant half-point at its March 21-22 meeting. As the Fed raises its benchmark rate, interest rates on mortgages, auto loans, credit cards, and many business loans often rise.
Inflation has been declining for eight months as compared to a year earlier. Consumer prices increased 6% year on year in February, down from 6.4% in January and significantly below the recent peak of 9.1% in June. Yet, it is significantly beyond the Fed’s 2% annual inflation target. Core prices grew 5.5% year on year in February, down from 5.6% in January.
Inflationary pressures continue to pervade much of the economy. Rents, grocery costs, hotel, restaurant, and airline ticket prices have all risen as more Americans seek homes and spend money on travelling, dining out, and attending entertainment events.
Goldman Sachs’ top economist, Jan Hatzius, believes the Fed’s policymakers will pause rate hikes next week. Goldman had earlier forecast a quarter-point increase. Hatzius remarked in a client letter that the Fed appeared to be more concerned with soothing the banking sector and financial markets than with battling inflation.
“We would be shocked if policymakers risked undermining their efforts by raising interest rates again just one week after going to great measures to protect financial stability,” Hatzius wrote in a separate note Monday.
If the Fed does suspend rate hikes this month, Hatzius predicts they will restart when the Fed meets again in May. Finally, he believes the Fed will raise its main rate, which affects many consumer and commercial loans, to around 5.4% this year, up from 4.6% now.
The aftermath of the failures of Silicon Valley Bank and New York-based Signature Bank may provide the Fed with unintentional assistance in its fight against inflation. As a result, many small and medium-sized banks may reduce lending to shore up their finances. Less lending could assist to cool the economy and curb inflation.
The likelihood of a Fed delay highlights the abrupt change in the nation’s financial system and economy in just one week. Powell told the Senate Banking Committee on Tuesday that if hiring and inflation remained strong, the Fed would likely raise rates by a half-point at its meeting this month.
That would have signalled a resumption of the Fed’s efforts to tighten credit. The central bank lifted its benchmark rate by a quarter-point in February, a half-point in December, and three-quarters of a percent four times previously.
Powell warned the next day, while speaking before a House committee, that no final decision had been made on what the Fed would do at its March meeting. Yet, the government reported on Friday that companies added 311,000 jobs last month. It was interpreted as a possible sign of ongoing high inflation, prompting projections of a half-point raise at the Fed’s meeting next week.
However, Silicon Valley Bank failed later that day, imposing a completely new set of problems on the Fed.
