 |
| Fed Considers Next Rate Move as US Inflation Drops to 6% |
According to Andrew Michael, US inflation decreased to 6% in the year leading up to February 2023, down from the 6.4% reported the previous month. While this is a step in the right direction, the figure still poses a challenge for the Federal Reserve's upcoming decision on its benchmark target interest rate, scheduled for March 22. This decision comes a day before the Bank of England's announcement on the UK Bank rate.
In addition to inflation, the Fed is currently grappling with three bank failures in the past week, as well as wider concerns about financial stability. These recent events have left US investors uncertain about the direction the central bank will take next.
Official figures from the US Bureau of Labor Statistics show that consumer prices increased by 0.4% month-on-month in February 2023. The largest contributor to the monthly rise in prices was housing, which accounted for nearly three-quarters of the increase. Food, recreation, and household furnishings also contributed to the overall increase in prices.
While US consumer prices have fallen for the past eight consecutive months, the Fed is mandated to maintain inflation at 2% over the long-term. Despite small decreases, commentators say that inflation has remained stubbornly high, indicating that the Fed has more work to do to bring prices under control.
Richard Carter, head of fixed interest research at Quilter Cheviot, suggests that inflation will continue to be the key driver of decision-making for the Fed. However, recent events surrounding the failure of Silicon Valley Bank and the voluntary liquidation of crypto-focused lender Silvergate have added to concerns about the US economy's overall stability.
Oliver Rust of data aggregator Truflation notes that the Federal Reserve had previously indicated it would hike rates by 50 basis points at its March 22 meeting, following January's higher-than-expected consumer prices data. However, given the ongoing banking issues and the delicate situation, it is now more likely that the Fed will opt for a 25bps hike. A 50 basis point hike could shock already nervous markets.
In summary, the upcoming decisions of the Federal Reserve and the Bank of England are complicated by a variety of factors, including inflation concerns and recent banking issues. While inflation has decreased slightly, it remains stubbornly high, indicating that the Fed has more work to do. Recent events surrounding US banks have added to market uncertainty, making it more likely that the Fed will opt for a more cautious approach when it announces its benchmark target interest rate.
