The government’s inflation report released Tuesday is expected to show that price acceleration in the United States remained very high in February, putting the Federal Reserve in a very difficult position.
The Fed is expected to raise interest rates by at least a quarter when it meets next week. Many analysts even expect an aggressive half-point increase if Tuesday’s report for February shows higher inflation again. But before the end of last week two major bank failures and some emergency measures announced by the Fed to try to increase confidence in the financial system.
With bank stock prices cratering there and fear of more financial instability roiling the market, most savers now expect the Fed to pause its rate hike next week so as not to cause instability in a delicate moment for the banking system.
At the same time, inflation continues to exceed what the Fed expects. Economists had expected Tuesday’s report to show that consumer prices rose 0.4% from January to February, according to a survey of economists by data provider FactSet. That would be slightly less than the increase from December to January but still too fast to be consistent with the Fed’s 2% annual inflation target.
Economists had predicted that compared to a year ago, overall inflation rose 6% in February, down from a 6.4% year-over-year jump in January. They also estimated that core prices, which exclude volatile food and energy costs, rose 5.5% from a year ago. That would be just slightly below January’s annual pace of 5.6%.
Jan Hatzius, chief economist at Goldman Sachs, said Goldman now thinks Fed policymakers will pause next week’s rate hike. Goldman had previously predicted a quarter-point increase. In a note to clients, Hatzius noted that the Fed, for now, appears to be more focused on calming the banking sector and financial markets than fighting inflation.
“We will be surprised if, just one week after going too long to support financial stability, policymakers risked undermining their efforts by raising interest rates again,” Hatzius wrote in a separate note on Friday.
If the Fed does not pause rate hikes this month, Hatzius predicted, it will likely resume when they meet in May. Ultimately, they still expect the Fed to raise the key rate, which affects much of consumer and business debt, to about 5.4% this year, from 4.6% today.
The Fed may seek unintended help in its inflation battle from the effects of the collapse of Silicon Valley Bank and New York-based Signature Bank. In response, many small and medium-sized banks were able to withdraw loans to support their finances. Lower credit rates can help boost the economy and slow inflation.
The possibility of a Fed pause underscores the sharp changes in the country’s financial and economic system in nearly a week. Last Tuesday, Fed Chairman Jerome Powell told the Senate Banking Committee that if rents and inflation continue to heat up, the Fed will be able to raise rates at this month’s meeting by half a point. That would signal another acceleration in the Fed’s efforts to tighten credit. The central bank has raised its benchmark rate by a quarter of a point in February, half a point in December and three-quarters of a point four times before.
The next day, testifying before a House committee, Powell warned that no final decision had been made on what the Fed would do at its March meeting. Still, on Friday, the government reported that employers added a strong 311,000 jobs last month. This is a sign of the potential for continued inflation, and has led to predictions of a half-point hike at next week’s Fed meeting.
Later that day, however, Silicon Valley Bank failed, thrusting an entirely new set of concerns to the Fed.
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