Topline
Annual inflation in February fell for an eighth-straight month—temporarily easing concerns about the future of the Federal Reserve’s economic tightening campaign—but some experts are increasingly worrying the government’s plan to guarantee failed bank deposits may complicate the path of inflation, and ultimately make it worse.
Federal Reserve Chair Jerome Powell testifies during a Senate Banking Committee hearing on Capitol … [+]
Key Facts
Consumer prices rose 6% on an annual basis, according to data released by the Labor Department on Tuesday, marking the smallest year-over-year increase since September 2021 and falling in line with economist expectations after a 6.4% spike in January.
Rent prices were the biggest contributor to overall inflation, the government said, noting they accounted for 70% of the year-over-year spike, while food, recreation and furniture prices also fueled gains.
The latest data comes after Silicon Valley Bank and Signature Bank abruptly failed within a matter of two days, as liquidity concerns triggered fears of contagion and pushed the Fed and Treasury Department to release a plan to guarantee deposit funds
“The SVB rescue package is essentially a new form of quantitative easing,” says Nigel Green, CEO of wealth advisory DeVere Group, referring to the bond-buying program governments used to stabilize the financial system and prop up the economy during the pandemic and Great Recession.
As a form of quantitative easing, Green argues the government’s failed-bank rescue plan effectively increases the supply of the dollar in circulation, potentially reducing the currency’s purchasing power and making it more vulnerable to depreciation.
Crucial Quote
“If the bank crisis is limited to just a few banks, then the actions taken on Sunday by the Fed and Treasury will prove inflationary,” says Sevens Report analyst Tom Esssaye. “By backstopping the depositors, the government has avoided the lion’s share of economic loss from this crisis,” he says, and the $25 billion Bank Term Funding Program, which offers banks loans of up to one year, will increase the Fed’s balance sheet a time when it’s actively trying to shrink it, further reversing the central bank’s recent policy actions, Essaye explains.
What To Watch For
It’s still very unclear how Fed officials will react to the banking sector’s struggles; however, officials will be forced to respond to the turmoil at the conclusion of the central bank’s next policy meeting, on March 22. Before the crisis, many experts predicted the Fed may accelerate the pace of rate hikes later this month—authorizing a half-point increase after a quarter-point hike last month. After SVB’s collapse, analysts at Goldman Sachs on Sunday said the firm “no longer expects” the Fed to hike interest rates this month. Others, including investment bank Nomura, followed suit, calling for no increase next week.
Further Reading
Inflation Fell To 6.4% In January (Forbes)
Biggest Bank Failure Since Great Recession Sparks ‘Overblown’ Fears Of Contagion—But Big Lingering Risks Remain (Forbes)
Goldman Expects No Fed Rate Hike In March After SVB Collapse (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2023/03/14/inflation-fell-to-6-in-february-but-some-experts-fear-banking-crisis-could-make-prices-worse/