Fed seen delivering quarter-point rate hike next week after latest US inflation data

US consumer inflation edged down in February but stayed elevated, which may be enough to push the Fed to raise rates again next week. PHOTO: BLOOMBERG

WASHINGTON – The Federal Reserve is seen raising its benchmark rate a quarter of a percentage point next week and delivering another hike of the same size in May, as a government report on Tuesday showed consumer prices in the United States rose slower but solidly in February.

Prices of Fed funds futures reflected about a 90 per cent chance of a quarter-percentage point rate hike in March, with about a 10 per cent chance seen of no change. The current target range is 4.5 per cent to 4.75 per cent.

Until late last week, financial markets had been pricing in a half-point rate hike at the Fed’s March 21 to 22 meeting to stem high inflation.

Expectations shifted abruptly after a bank run triggered the failure of Silicon Valley Bank (SVB) on Friday and a dramatic move over the weekend by the Fed and other US regulators to shore up confidence in the banking system.

Rate futures contracts pricing now points to the Fed reversing course with rate cuts starting as early as June, with rates seen ending in 2023 below where they are now.

US consumer inflation edged down in February but remained elevated, which may be enough to push the Fed to raise rates again next week despite the failure of SVB and Signature Bank.

The consumer price index (CPI) rose 6 per cent from a year ago, below January’s figure and in line with expectations, according to Labour Department data.

But even though this was the smallest annual rise since September 2021, the level remains well above policymakers’ longer-term 2 per cent goal.

The annual CPI peaked at 9.1 per cent in June, which was the biggest increase since November 1981.

Between January and February, the CPI rose 0.4 per cent, slowing from the previous month as well.

The US central bank has been on an aggressive campaign to tame inflation, raising interest rates eight times since early 2022 to ease demand.

While Fed chair Jerome Powell initially said the central bank was prepared to increase the pace of rate hikes if necessary as economic data runs hot, the bank failures may complicate its efforts.

The implosion marked the biggest banking failures since the 2008 global financial crisis, leaving the Fed in a tough position as it tries to battle inflation without adding to an ongoing rout of some banking stocks.

So-called “core” CPI, which removes volatile food and energy prices, had a monthly increase slightly above economists’ expectations, while the year-over-year change came in line with what they anticipated.

The core CPI increased 0.5 per cent on a monthly basis after rising 0.4 per cent in January.

In the 12 months through February, the so-called core CPI gained 5.5 per cent after advancing 5.6 per cent in January.

Economists said Tuesday’s report remained important for policymakers, despite the angst in financial markets from the bank failures.

Mr Powell told lawmakers last week that the Fed would likely need to raise rates more than expected, leading financial markets to expect that a half-percentage-point rate increase was on the table next week.

But those expectations were dialled back to 25 basis points after a strong employment report.

Fear of contagion from the banking crisis prompted some economists, including those at Goldman Sachs, to expect the Fed next week to pause its fastest monetary policy tightening cycle since the 1980s.

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