US inflation data comes at tricky time for Fed amid SVB fallout

US inflation is expected to remain hot enough to further complicate the path forward for the Federal Reserve as it contends with three bank failures and broader concerns about financial stability.

The consumer price index is forecast to have risen 6 per cent year on year in February, according to a consensus estimate compiled by Reuters, which would represent a 0.4 per cent increase from the prior month. That is a step down from the annual 6.4 per cent pace registered during January, though still elevated.

Stripping out volatile food and energy prices, “core” CPI is expected to have climbed another 0.4 per cent in February from the previous month, which would translate to a 5.5 per cent annual increase. In January, core CPI was running at 5.6 per cent year over year.

The data, set to be released by the Bureau of Labor Statistics at 8:30am Eastern Time on Tuesday, comes at a tricky moment for the Fed, which on Sunday evening was forced to step in to contain the fallout from the abrupt failure of Silicon Valley Bank on Friday.

After a frenzied weekend during which no buyer emerged to absorb the beleaguered tech lender — which at that point had been taken over by the Federal Deposit Insurance Corporation — government authorities rushed to pull together a rescue package before Asian markets opened on Monday.

Not only were deposits guaranteed in full for account holders at SVB and Signature Bank, another lender that was shuttered by regulators on Sunday, but the central bank unveiled a new lending facility to ensure that “banks have the ability to meet the needs of all their depositors”.

The so-called Bank Term Funding Program, which is backstopped by $25bn from the Treasury department, offers loans of up to one year to lenders that pledge collateral, including US Treasuries and other “qualifying assets”, which will be valued at par.

Despite these measures, shares of First Republic and other regional banks perceived as vulnerable in the wake of SVB’s collapse fell sharply on Monday.

Against this backdrop, investors and economists have rapidly altered their outlooks on the path forward for the Fed, which just last week was toying with the idea of accelerating the pace of its interest rate increases and opting for a half-point rate rise at its meeting on March 21-22.

Speaking before Congress earlier this month, prior to the banking blow-up, chair Jay Powell said the Fed would respond more aggressively to raise rates if the data suggested a sustained rebound in economic momentum. He also warned at the time that the end point of the Fed’s monetary- tightening campaign, known as the terminal rate, would likely need to be higher than the 5.1 per cent level most officials pencilled in at the end of 2022.

The inflation report is the latest in a series of important data releases Powell said he would be watching to determine the size of the next rate rise. Another was the February jobs report, which showed employers had added 311,000 jobs last month, a slower pace than the previous blowout figures but still well above what officials indicate is in line with easing price pressures.

The Fed had already scaled back the scale of its tightening to a more traditional quarter-point pace in February, after multiple half-point and three-quarter-point moves last year.

But in the aftermath of the bank failures — which also included the voluntary liquidation of crypto-focused lender Silvergate last week — Wall Street is divided as to whether the Fed will proceed with another quarter-point rate rise or forgo an increase altogether. Expectations for the terminal rate, which at one point topped 5.5 per cent, have also been revised lower.

In just one year, the central bank has lifted its benchmark policy rate from near zero to nearly 4.75 per cent — a historically aggressive pace that some believe also contributed in part to SVB’s demise given its holdings of long-term fixed-rate bonds and lack of protection against rising rates.

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