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US inflation has yet to fall below 6% and poses a severe dilemma for the Fed

US inflation has yet to fall below 6% and poses a severe dilemma for the Fed

Washington – The maintenance of inflation around 6% in the United States and the bank run unleashed by the bankruptcy of Silicon Valley Bank (SVB) put the Federal Reserve before an iron dilemma: continue raising the basic interest rate or give it a truce for the financial market to avoid contagion from a crisis with the potential to damage the global economy.

Inflation eased again in the world’s leading economy last month, when it closed the previous twelve-month period at 6%, marking its lowest level in a year and a half.

Of any firm, that figure is still very high and far from the long-term objective of 2% of the monetary authority, which before the start of the banking crisis had indicated its inclination to continue tightening its rate policy. Annual inflation would have climbed to 6.4% in January.

The information is known in a context of difficulties for the Federal Reserve (Fed, central bank), under pressure due to the bankruptcy of the SVB bank and two other entities before their monetary policy meeting next week to define how much they will increase their rates reference interest.

In the month-on-month comparison, the price increase was 0.4%, in line with analysts’ expectations, after the rebound in January.

Underlying

“Inflation registered the expected variation, but core inflation (which does not include volatile prices such as food and energy) was higher than expected,” said Rubeela Farooqi, chief economist at HFE.

“The housing index was the largest contributor” to the price increase, “accounting for more than 70% of the increase,” the Labor Department said in a statement. Food, leisure and purchases of household equipment also contributed to the rise in prices.

Energy prices, which have been triggered by the war in Ukraine since last March, continue to fall, 0.6% compared to January. In one year, however, they are 5.2% more expensive.

The Fed has waged an aggressive campaign to rein in runaway inflation, raising interest rates eight times since the beginning of last year to cool the economy and moderate demand.

For President Joe Biden, “the challenges” in the banking sector show that there will be “setbacks” on the path to “durable and stable growth.”

While Fed Chairman Jerome Powell initially said the central bank was prepared to increase the pace of rate hikes and their magnitude if necessary as economic data remains positive, the bank collapse Silicon Valley Bank last week, Signature Bank and Silvergate Bank in recent days, may cause the body to stop these increases or moderate them beyond what was initially expected by the market.

Crossroads

The collapse of those banks has put the Open Market Operations Committee (FOMC), the Fed’s monetary committee, in a difficult position: trying to bring down inflation while affecting stock prices as little as possible. of the banks. This leads analysts at Goldman Sachs and Wells Fargo to predict that the Fed will end its rate hike cycle on March 22, while economists at JP Morgan and Oxford Economics are more likely to be less than a quarter of a percentage point.

The financial authorities of the United States announced a series of measures over the weekend to try to restore confidence in the banking sector and calm the markets, guaranteeing access to deposits.

The Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) put in place plans to ensure that SVB customers could access all of their deposits. And they provided the same for Signature Bank customers.

The Federal Reserve also introduced a new bank lending tool to prevent a repeat of what happened with SVB. But while the United States has decided to protect all deposits, it will not bail out the bank’s investors, President Joe Biden warned, because they took a chance and lost and “so
It’s how capitalism works.”

The announcements were welcomed by financial markets, although investors continued to avoid bank shares and analysts are concerned about the consequences of SVB’s bankruptcy.

Pause?

“The rapid tightening of financial conditions coupled with the uncertainty of the situation makes us lean towards the FOMC pausing its hike campaign at its next meeting on March 22,” Wells Fargo economists wrote in a note. recent to investors.

Others believe it will rise, like Michael Feroli of JP Morgan. “If they have indeed used the right tool to address financial contagion risks – time will tell – then they may as well use the right tool to continue to address inflation risks: higher interest rates,” he wrote to clients. on Sunday.

Last Thursday, futures brokers were predicting a 50 basis point rate hike, according to the CME Group’s FedWatch Tool. However, the SVB bankruptcy changed the forecasts.

Source: Ambito

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