Inflation And Bank Failures Shake The Fed

With the aggressive quantitative tightening, the US CPI fell again as expected in February 2023 to 6% YoY down from 6.4% in January 2023, while the CPI met expectations and increased by 0.4% MoM as shelter costs increased sharply.

The Core CPI, on the other hand, came slightly higher than expected increase by 0.5% in February and 5.5% YoY meeting expectations, the inflation rate is triple the Fed's target, shelter costs are rising significantly and which indicates the continuation of a rising interest rate environment.


“If the totality of data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said during his testimony at Capitol Hill warning that rates may have to be raised more than initially anticipated given how significantly both the jobs and inflation figures have exceeded all forecasts.


The market sentiment has now changed; analysts are divided between whether the Fed will hike interest rate one more time, or keep it as is. However, after the CPI report, the probability of increasing by 25 basis points rose. It is also expected that the next interest rate hike could be the terminal rate at around 4.95% on Tuesday morning.


“While only moderately higher than consensus, in the pre-SVB crisis world this may well have pushed the Fed to hike 50bp at its March meeting next week. It is a sign of how much things have changed in the very near term that 50bp is almost certainly still off the table for March,” said Krishna Guha, head of global policy and central bank strategy for Evercore ISI as per CNBC.


Goldman Sachs also expects a pause in the aggressive tightening monetary policy amid the banking sector turmoil “In light of recent stress in the banking system, we no longer expect the (Fed) to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March,” Goldman Sachs said in a note to clients. While Barclays forecast the Fed to keep it as is during the next meeting with a terminal rate of 5.25% representing a half point less than the previous forecast.

At this moment, the Fed has a lot to carry on its shoulders with Silicon Valley, Silvergate, and Signature Banks collapsing since the beginning of March.

This fact makes inflation not the sole target of the Fed, but rather not recreating a 2008 financial crisis, which is not something the world wants to hear.


Once Silicon Valley Bank failed, the American government acted to restore public confidence in the banking industry. However, concerns over contagion from the collapse caused Moody to cut its view on the U.S. financial system, citing a "crisis of trust" in the sector.


The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.