Last week, after hawkish testimony from Federal Reserve Chair Jerome Powell, markets penciled in a half-point increase in interest rates following the central bank’s next policy meeting. On Friday, the run on Silicon Valley Bank and subsequent fears of a wider crisis changed many investors’ minds. Some bet that the Fed would forgo further rate hikes entirely this year.
The latest inflation figures suggest that would be a mistake. The need to keep pressing down on demand hasn’t gone away, and the SVB fiasco shouldn’t deflect the Fed from the goal Powell outlined: getting the inflation rate back down to its stated goal of 2%.
Consumer prices rose 0.4% in February, or 4.5% at an annual rate. Core CPI inflation, excluding food and energy, rose by 0.5%, or 5.6% at an annual rate. The prices of core services, to which the Fed pays especially close attention (albeit using a different metric), went up 0.6%, or 7.7% on an annual basis. New figures for wholesale prices pointed the other way, surprising analysts by showing a decline. Taken together, the numbers suggest that the trend in inflation may be flattening out at more than twice the central bank’s target — and that the current policy rate of 4.5% – 4.75%, far from being appropriately restrictive, is still zero or less in real terms.
