February CPI Data Gives Markets a Boost and Puts the Fed in a Dilemma
Inflation data released on Tuesday showed that consumer prices rose 0.4% in February, in line with analyst expectations. Core CPI, which strips out food and energy, was up 0.5%, higher than the 0.4% expected by economists. This marks the highest monthly increase of core CPI since September 2021. Year-over-year numbers fell to 6.0% from 6.4%, while the core fell to 5.5% from 5.6%. The news sent markets rallying on Tuesday morning as traders increased their expectations for a 0.25 percentage point hike in the Federal Reserve’s benchmark federal funds rate.
The news was welcomed by the markets, but the Federal Reserve still faces a tough decision on whether to raise rates or not. With the collapse of Silicon Valley Bank and Signature Bank, the central bank has to weigh the potential risks to financial stability against its mandate to contain inflation. Markets are now pricing in a 74% probability that the Federal Open Market Committee could raise rates by 25 points at the upcoming meeting, up from 65% on Monday and 30% one week ago, according to the CME FedWatch Tool.
Markets have been anticipating a pause in the rate hikes for some time, but the recent collapses in banking have made it even more likely. The Fed’s dual mandate of stable prices and maximum employment has pushed inflation to the forefront, and the February CPI data has given the Fed some solace that pausing here would not overly inflame inflation metrics.
Still, the Fed needs to take into account financial stability and lending conditions, and many are cautioning against a rate hike in light of the recent banking issues. The decision on whether to raise rates or not has become more complex and uncertain, and the markets will be watching closely to see how the Fed responds.
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