Latest CPI Report: Fed Likely to Increase Rates Despite Banking Turmoil
The recent Consumer Price Index (CPI) report released Tuesday revealed that headline inflation rose 0.4% month-over-month in February and 6% over the prior year, a slowdown from January's 0.5% month-over-month increase and 6.4% annual gain. The data was in-line with economist expectations, according to Bloomberg.[0] Core inflation, which strips out the more volatile costs of food and energy, rose 0.5% over the prior month in February and 5.5% over last year, marking the smallest 12-month increase since December 2021.
Today's Consumer Price Index report has likely prompted the Federal Reserve to raise their terminal rate by ¼% at their upcoming FOMC meeting (March 21 – 22). The CME's FedWatch tool shows that the likelihood of a 25-bps rate increase is 81.9%, while the probability that the Fed will not raise rates is 18.1%.[1]
Although the yearly inflation rate has been decreasing, and the banking sector has been in disarray, financial markets are still anticipating the Federal Reserve to raise interest rates when it convenes next week. Inflation figures have largely been the main calculus in the Fed’s decision to increase interest rates, but a banking crisis that was reported this weekend further exacerbates the ability of the Fed to reduce inflation and not lead the country into a recession.[2]
The Federal Reserve, with a benchmark interest rate target of 4.5%-4.75%, has raised rates by a total of 4.5% in the past year in order to control inflation.[0] The highest consumer prices in about 40 years were seen last summer, reaching a rate of 9.1%.[0]
The latest inflation data could spur the Fed to press ahead in its effort to tighten monetary conditions. But the Fed will need to weight the instability in the banking system when it gathers next week to decide on interest rates.[3] Investors, who were betting on the possibility of a 50 basis-point hike at the Fed’s March 21-22 meeting prior to the banking crisis, are now pricing in the likelihood of a 25 basis-point hike with a pause an option.[4]
Overall, it is clear that the battle against inflation is far from over. Despite recent banking industry turmoil, the Federal Reserve is still likely to increase interest rates when it meets next week.
0. “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
1. “Headline CPI fractionally lower as gold futures hold key $1900 level” Kitco NEWS, 14 Mar. 2023, https://www.kitco.com/commentaries/2023-03-14/Headline-CPI-fractionally-lower-as-gold-futures-hold-key-1-900-level.html
2. “US inflation slows to 6% annual rate amid looming banking crisis” The Guardian, 14 Mar. 2023, https://www.theguardian.com/business/2023/mar/14/us-inflation-slows-banking-crisis
3. “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
4. “Fed rate pause is a tough call after inflation reaccelerates” Moneycontrol, 15 Mar. 2023, https://www.moneycontrol.com/news/world/fed-rate-pause-is-a-tough-call-after-inflation-reaccelerates-10250741.html
