The US Bureau of Labor Statistics will release inflation data for February on Tuesday morning as investors continue to process the fallout from the Silicon Valley Bank collapse and assess what it means for the broader economy.
Forecasts were for a 12-month headline inflation reading of 6%, down from 6.4% in January.
Before the SVB collapsed on Friday, analysts still feared that the US economy was running too hot to be able to contain inflation, with some forecasters even betting that the Federal Reserve would have to raise its key Fed rates at its meeting this month. The funds rate will have to be increased by 0.5%. That’s up from a 0.25% increase at the January meeting.
But in the wake of SVB’s seizure by regulators, the US economy could find itself at the start of a new chapter, with companies less willing to invest and thus reducing market demand – and price growth.
Late Sunday, Jan Hetzius, chief economist at Goldman Sachs, wrote in a note to clients that she believes the Fed will have to “halt” its rate hike program entirely as a result of the SVB collapse.
“While we agree that more tightening will be needed to address the inflation problem if financial stability concerns pan out, we think Fed officials are likely to prioritize financial stability for now.” ,” Hatzius wrote.
He added: “Financial stability is an immediate concern and policymakers need to safeguard it at every turn, while inflation is a very slow-moving problem.”
Other economists suggested that news of the SVB failure has so far done little to change the trajectory of price increases in the US economy and thus pressure the Fed to continue raising rates.
“Despite the huge volatility in the market over the past few days, there has been little to really impact our outlook for inflation so far this year,” Citibank economists wrote in a note to clients on Monday.
He said the Fed is unlikely to put a hold on rate hikes.
“Doing so would invite markets and the public to assume that the Fed’s resolve to fight inflation is only up to the point that there is a rebound in financial markets or the real economy,” the Citi economists wrote.
Indeed, there are differing views about what the Fed will do next as it continues its firefight against inflation.
Morgan Stanley said in its most recent note to clients that it could not rule out a 0.5% hike. Evercore’s ISI research unit and JP Morgan both believe a 0.25% increase is more likely. In addition to Goldman Sachs, Barclays Financial Group also believes that the Fed will stop its rate hike regime altogether. And Nomura Securities believes the Fed may even cut interest rates at its next meeting.
Beyond the outcome of the SVB saga, of course, Fed decision-making on interest rates, which affect the cost of borrowing in the US economy, will be tied to how it manifests in the economy’s ongoing inflationary pressures. .
One element the Fed is watching closely is the price of services, which are heavily influenced by the cost of paying workers.
Ian Shepherdson wrote, “Payroll growth over the past few months has run at a more sustainable pace than anyone thought, so policymakers will remain concerned about the prospect of wage growth in line with the (2%) inflation target.” Written by Ian Shepherdson, Chief Economist at Pantheon Macroeconomics Research Consultancy.