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Tight spot… FOMC members will find themselves in a difficult position this week. Persistent high inflation would seem to warrant another rate hike. But Silicon Valley Bank’s failure on March 10 revealed weaknesses in the banking system. If the FOMC were to increase its federal funds rate target in March, some banks might buckle under the stress. If the FOMC were to pause rate hikes, market participants might come to doubt its commitment to bringing down inflation.
Markets think the FOMC will attempt to thread the needle by raising rates a bit less than previously expected. On Sunday, the CME Group reported a 62.0 percent chance of a 25 basis point hike in March, down from 81.9 percent one month ago. It put the odds of a pause at 38.0 percent (up from 0.0 percent), while those of a 50 basis point hike were at 0.0 percent (down from 18.1 percent).
Changing stance… Although a 25 basis point rate increase would likely be reported as further tightening, it would reflect an easing of sorts. The stance of monetary policy depends not only on the current rate target, but the expected path of rate targets. Two weeks ago, markets expected rates would climb more rapidly over the near term, as the Fed redoubles its efforts to fight inflation. Fed Chair Jerome Powell seemed to confirm this view. "The latest economic data have come in stronger than expected,” he told the Senate on March 7, “which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
A 25 basis point hike would be a step back from the tighter stance Fed officials signaled in late February and early March.
The incredible unshrinking balance sheet… The Fed’s asset holdings ticked up last Wednesday, as it provided liquidity to financial institutions. Its total lending increased by $140.5 billion. Most of the additional lending came through the discount window (+$80.5 billion). It recorded $57.2 billion in other credit extensions to depository institutions established and guaranteed by the Federal Deposit Insurance Corporation. The Fed’s new Bank Term Funding Program extended a mere $2.4 billion in loans, much less than was anticipated.
Persistent Price Pressure… The consumer price index (CPI) grew at a continuously compounding annual rate of 4.4 percent in February, which was slower than January (6.2 percent) but still much higher than December (1.6 percent).
Core CPI inflation, which excludes volatile food and energy prices, has climbed from 4.8 percent in December to 4.9 percent in January and 5.4 percent in February.
Survey says… Consumer sentiment declined 5.4 percent in March, the Michigan Survey reports. Perhaps more troubling, the decline does not reflect the fall out from the recent bank failures.
“This month’s decrease was already fully realized prior to the failure of Silicon Valley Bank,” Surveys of Consumers Director Joanne Hsu wrote. It seems likely, then, that consumer sentiment will decline even further as these numbers are revised later in the month.
The survey also reported a decline in year-ahead inflation expectations. Whereas consumers expected 4.1 percent inflation for the year beginning in February, they expected just 3.8 percent inflation for the year beginning in March. It is the lowest rate recorded since April 2021, but remains well above the pre-pandemic range.
Resource use… Capacity utilization has been more-or-less flat over the last three months. In February, it was at 77.8 percent, compared with 78.0 percent in January and 77.9 percent in December.
Capacity utilization fell to 64.5 percent in April 2020, before climbing to 80.2 percent in April 2022 and then declining in October, November, and December 2022.