Core inflation is rising, challenging the Fed amid banking instability

diving letter:

• A measure of inflation excluding volatile food and energy prices rose 0.5% in February, the highest in five months, as Federal Reserve policymakers weighed the benefits of further monetary tightening against the risk of greater instability in the banking sector.
• The core CPI rose 5.5% year-on-year last month, more than double the Fed’s 2% target. The consumer price index including food and energy prices rose 6% yoy last month, an improvement from January’s 6.4% pace The Ministry of Labor announced on Tuesday. The indices for natural gas and heating oil prices fell.
• High inflation has eroded small business optimism about the next six months National Association of Independent Businesses said Tuesday. “Small business owners remain doubtful that business conditions will improve,” NFIB chief economist Bill Dunkelberg said in a statement. “They continue to struggle with high inflation and labor shortages that are holding back growth.”

Dive insight:

Fed Chair Jerome Powell hinted before Congress last week that the central bank could hike interest rates more than expected this year, citing a strong labor market, consumer spending, solid manufacturing and inflation.

Fed officials last month raised interest rates to a range of 4.5% to 4.75% and in a median estimate in December projected they would hike it to 5.1% by the end of 2023.

The failures of Silicon Valley Bank and Signature Bank — and the risk that government support for depositors announced on Sunday may not stem financial contagion — have dampened expectations that the Fed will step up its most aggressive monetary tightening in 40 years.

Investors on Tuesday saw a 65% chance the Fed would cut the federal funds rate at the end of a two-day meeting on March 22 the CME FedWatch tool.

They were looking at a 78% chance of a half-point move after Powell testified on March 8, according to CME, which calculates expectations based on trading in interest rate futures markets.

A sharp hike in interest rates by the Fed could shake weak confidence in the banking industry. The SVB failed to adequately hedge against rising interest rates in one of the missteps that led to its collapse.

Emergency housing prices rose 0.8 percentage points last month, the highest of any category in Labor Department data. According to the Atlanta Fed, such prices are “fixed” or change relatively slowly, along with medical, education, and personal care services.

The Atlanta Fed Sticky Price CPI rose 6.8% yoy last month after up 6.3% in January, in line with the rise in core CPI.

Fed policymakers at their two-day meeting on March 21 will also take into account recent signs that their hike in borrowing costs has failed to ease the labor market significantly.

Employers added 311,000 jobs last month after reporting half a million wage increases in January, the Labor Department said on Friday. There were almost two job offers for every unemployed person.