the Fed on the verge of losing control of inflation
Inflation is falling, but at 6% in February, it is still too high. And the trap closes on the Fed, the American central bank. The institution chaired by Jerome Powell must increase its rates, currently set above 4.5%, to continue to fight against the general rise in prices. But this policy led to the bankruptcy of the bank of California Silicon Valley Bank, whose bond portfolio had lost more than 15%. Between inflation and financial stability, will the Fed have to choose?
The US consumer price index for February, published on Tuesday March 14, does not provide a decisive answer. Over one year, inflation reached 6%, against 6.5% last month, and 5.5% excluding energy and food. The fall is significant compared to the record of 9.1% reached in June 2022. But month by month, the trend remains too strong compared to the 2% target that the central bank says it wants to reach: prices have still increased by 0.4 point between January and February, and this figure reached 0.5 point excluding energy and food. Concern remains high for housing prices (+0.8 points), while the rise in other services is accelerating again. Inflation is “still too high and shows no signs of falling”deplores Harvard economist Jason Furman.
In this context, what will the Fed do after the next meeting of its monetary policy committee, on March 22? Before the bankruptcy of the Silicon Valley Bank (SVB), it had started on a rise of half a point to try to regain control of the situation after bad inflation figures. “I have all respect for Powell, but the fact is that we have lost control of inflation a bit”, had criticized the boss of JPMorgan, Jamie Dimon. The good performance of employment and the persistence of inflation in February should have reinforced it, but the collapse of the SVB has suddenly made its task almost inextricable.
Collapse of market rates
The impact of this bankruptcy, the most serious since 2008, is more complicated to assess than it seems: apparently, it will prevent the Fed from raising its rates, because it would be taking the risk of aggravating the losses of the institutions. financial institutions that bought treasury bills during the free money period and sometimes lost more than 15% in value (when rates go up, the value of the bonds goes down until they approach the yield of the new rates of market).
Except that the reality on Wall Street is very different: in panic, market rates have collapsed for a week, operators fleeing risk and accepting lower compensation by buying Treasury bonds at any price. Thus, since early March, ten-year rates have fallen from 4% to 3.6%, and two-year rates have fallen by more than 5% to 4.2%. This massive relaxation reduces the losses of the bond portfolios, but it produces the exact opposite of the policy desired by the Fed, which wants to cool the economy by increasing the cost of money.
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