A stubbornly high inflation headache for the Fed as it fights to shore up the US banking system
Stubbornly high inflation gave the Federal Reserve another headache yesterday as it struggles to shore up the US banking system.
As the fallout from the collapse of Silicon Valley Bank in California and Signature Bank in New York continued, official figures showed US inflation hit 6% in February.
That was down from 6.4% in January and a high of 9.1% last summer, but still well above the Fed’s 2% target.
Fighting inflation: The Fed has hiked rates aggressively and recent comments from Jerome Powell (pictured) left investors expecting a big hike next week
The Fed has been aggressively raising interest rates in an attempt to bring inflation down and recent hawkish comments from Chairman Jerome Powell had investors expecting another big hike next week.
But the markets have been betting since last Friday’s collapse of SVB may have given him a reason to stop.
Indeed, the demise of the Californian lender stems from the fall in the value of its bond holdings, which resulted from the rate hikes.
Fears that further hikes could weaken more US lenders are creating a dilemma for the Fed – and have been called a “battle of fire and ice” by Ted Pick, co-chairman of US banking giant Morgan Stanley.
Speaking at the bank’s European financial conference, Pick said: “It’s part of the process of turning the knob to tighten financial conditions to ensure we’re on track to normalize a lower rate world. higher interest.” But there may well be surprises.
Andrew Hunter, deputy chief U.S. economist at Capital Economics, said the latest numbers “add to the evidence that inflation remains stubbornly high.”
But he added: “The ongoing fallout from the SVB crisis over the next few days will likely have a bigger bearing on what happens at next week’s meeting.”
Just last week, Powell warned that interest rates were likely to rise, and possibly faster than expected, as inflation turned out to be more persistent than central bank officials had expected.
Brian Jacobsen, senior investment strategist at Allspring Global Investments, said: “The Fed is stuck between a rock and a hard place.
Inflation met expectations, but remains uncomfortably high. Financial strains are intense. Caution would dictate that they take a break, but couple that with a stark warning that if inflation trends don’t improve, they may need to hike further.