Inflation Cools Again, But The Economy Faces A Brand-New Wrinkle

Inflation Cools Again, But The Economy Faces A Brand-New Wrinkle
Paul Allison, CFA

9 months ago2 mins

Remember when all we had to worry about was inflation and interest rates? Amazingly, that was less than a week ago, back before the collapse of Silicon Valley Bank (SVB) was at the center of the world’s attention.

But it’s important now to turn your attention back to inflation for a moment, with new US data showing that prices rose 6% in February, compared to a year ago, exactly in line with expectations and cooler than the 6.4% pace recorded in January.

The data’s release comes just a week ahead of the next interest rate decision from the Federal Reserve (the Fed). And it underscores the challenge faced by the Fed, which for the past year has been trying to tamp down sky-high price increases by hiking interest rates, seeking to chill the economy just enough, but without plunging it into a recession or sparking devastating job losses. The crisis at SVB, stemming in part from higher interest rates and the impact that’s had on Treasury prices, highlights the razor-thin line the Fed is walking. And how high the stakes are.

What does this mean?

The fact that February’s 6% inflation wasn’t worse than expected might just be enough to give the Fed some breathing space. See, most people (including some inside the central bank) knew that jacking up rates at such speeds would come with consequences. But a widespread banking crisis would be too much collateral damage to bear, and in the aftermath of the SVB fallout, the Fed might like to take a pause from rate hikes to see if anything else nasty crawls out of the woodwork.

But let’s be clear, 6% inflation is still too high (the Fed’s long-term target, remember, is 2%), and only very recently policymakers were saying – forcefully – that its interest rate hikes are far from done. Luckily, the central bank’s got a few days to let the dust settle on the SVB drama. If those days prove to be calmer, it may be tempted to nudge out another rate rise, even if it is a smaller, 0.25 percentage point one…



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