Inflation data to come at critical moment for Fed policy after bank failures

After the failure of Silicon Valley Bank (SIVB), investors will be watching closely what earlier this month was seen 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 that consumer prices fell slightly last month, with headline inflation forecast up 6% from a year earlier, a slowdown compared to January Annual gain of 6.4%, according to Bloomberg estimates.

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

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

On a “basic” basis, which excludes the more volatile food and gas costs, prices in February are expected to have risen 0.4% from the previous month and 5.5% from the year. latest, according to data from Bloomberg.

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

“If the CPI and its tangle of subcomponents turn hotter than expected, the odds of a 50 basis point rate hike are greater,” wrote Bob Schwartz, senior US economist at Oxford Economics. “[Conversely]should this critical inflation gauge show more signs of slowing, Fed officials would likely take a more cautious approach, keeping the rate hike at the smallest 25 basis point taken at the last meeting.”

By mid-afternoon on Monday, markets were pricing a roughly 80% chance the Fed would raise rates 25 basis points at its March 22 policy meeting with a roughly 25% chance the Fed would leave. the rates unchanged, according to CME Group data.

Last week, investors put more than a 50% chance that the Fed would raise rates by 50 basis points this month after two days of testimony from Fed Chairman Jerome Powell which pointed out that interest rates were likely to go higher than expected.

Developments in the banking sector over the past week have altered this outlook.

“The threat of systemic disruption to the banking system is low, but the risk of stoking financial instability may well tempt the Fed to opt for a smaller rate hike at the next meeting,” Schwartz added. “The astonishing 45 basis point drop in the 2-year Treasury yield on Thursday and Friday supports this outlook.”

Wall Street economists remain divided on the decision with Goldman Sachs predicting the Fed won’t raise rates. Bank of America, EY and Oxford Economics argued for a 25 basis point hike.

The Fed, which has a current benchmark interest rate target of 4.5% to 4.75%, has raised rates by 4.5% over the past year in an effort to keep inflation in check. Consumer prices peaked last summer, hitting a roughly 40-year high of 9.1%.

The Federal Reserve has raised interest rates by 4.5% over the past year in a bid to curb inflation as Fed Chairman Jerome Powell pledges aggressive monetary policy .

The Fed’s focus on inflation and the labor market in policymaking will be uniquely challenged, as the central bank also manages its so-called “third termof financial stability following three bank failures last week.

The labor market also presents another complication for the central bank, with nonfarm payrolls growth of 504,000 jobs in January coupled with that of February. stronger than expected report unlikely to encourage an easing of the Fed’s aggressive policy.

“The Fed needs to see more evidence of reduced demand for labor to develop a more confident reading of the influence of tighter monetary policy that attacks incomes, demand consumption and therefore inflation, and in particular persistent services inflation,” Rick Rieder, BlackRock’s chief investment officer for global fixed income, wrote in a note on Friday.

Rieder added that the impact of the rate hike would further complicate next week’s decision, explaining: “Furthermore, the banking sector has recently suffered a blow to the jaw and markets have adjusted the price of rate hikes accordingly. the Fed based on the potential for increased risks to financial stability, we should keep in mind that the Fed’s other unofficial mandate has been the maintenance of financial stability.”

Alexandra Channel is a senior entertainment and media reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at

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