Inflation is easing, but fears about interest rates and recession remain

The Consumer Price Index (CPI), a measure of inflation, rose 6% year over year in February, according to the latest report from the Bureau of Labor Statistics (BLS). The CPI rose 0.4% month-on-month, largely due to rising housing costs, which accounted for more than 70% of the increase.

On an annual basis, the price of food at home increased by 10.2%. The cost of electricity services increased by 13.3%. And the prices of transport services increased by 14.6%.

However, the annual CPI increase was the smallest 12-month increase since September 2021, indicating that the Federal Reserve may ease monetary policy.

Despite a slowdown in inflation in recent months, many Americans are struggling financially after a year of high inflation in 2022, according to a recent poll. In fact, half of Americans say they are in a worse financial situation than they were a year ago, according to a January Gallup poll. The only other time this sentiment was reflected was during the Great Recession of 2008 and 2009.

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SVB’s collapse raises questions about rate hikes

To reduce inflation, the Federal Reserve has raised interest rates eight times in the past year. But the closing of commercial bank Silicon Valley Bank (SVB) on Friday and uncertainty spreading across the banking sector may prompt the Fed to slow, some economists predicted.

In fact, Goldman Sachs no longer expects the Fed to raise interest rates at its next two-day meeting on March 21 and 22. Treasury Secretary Janet Yellen noted that the rate hike was at the heart of the SVB termination.

“Markets expected a 50 basis point hike in the Federal Funds rate last week after a strong jobs report and inflation still higher than the Federal Reserve’s target,” said Dawit Kebede, senior economist at the Credit Union National Association ( CUNA). a statement. “That view changed over the weekend after the collapse of Silicon Valley Bank and Signature Bank.”

“The rapid and large increase in interest rates contributed to the collapse of these banks,” Kebede added. “This failure of financial institutions will make the Federal Reserve more cautious about unforeseen events that could cause volatility. Moreover, current interest rates are already showing the intended effects of slowing investment and consumption.”

However, Goldman Sachs believes the Fed could raise interest rates by 25 basis points in May, June and July. Ahead of the SVB collapse and the release of a strong jobs report, Fed Chairman Jerome Powell told a Senate committee that the Fed could raise interest rates by a wider range in response to a strong economy and high inflation .

“The Federal Reserve will likely prioritize financial stability as the most immediate concern over inflation, balancing those issues by enacting a quarter point increase while extending the timing of the overall tightening cycle,” Noah Yosif, economist at the National Association of Federally Insured Credit Unions (NAFCU), said in a statement. “This shock does increase the risk of a recession; however, such an event would be more likely to occur if the Federal Reserve were forced to undertake a prolonged pause in the current anti-inflation tightening cycle than from an independent crisis driven by rising pessimism.” and market turmoil’.

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Recession may still be on the horizon

The Fed’s decision to continue raising interest rates could slow inflation and bring it back to the 2% target range. But the move could also push the country into recession.

Although there is no official definition of a recession, many economists define it as two consecutive quarters of economic decline. This is what the country passed in 2022. However, the National Bureau of Economic Research (NBER) has never declared a recession.

However, uncertainty remains. Bank of America, Citigroup, the Mortgage Bankers Association and First National Bank of Omaha (FNBO) have predicted at least a mild recession in 2023.

“We won’t be at the Fed’s inflation target until 2024,” said Mike Fratantoni, MBA’s chief economist and senior vice president, at the 2022 MBA Annual Conference.

“We’re really, really confident that we’re going to be in a recession next year,” Fratantoni added.

According to FNBO’s 2023 Market Outlook, “Economic recession is likely in the US, as most economic indicators currently point to a slowdown to minimal and/or possible contraction. The Fed’s aggressive monetary tightening and higher interest rates may negatively impact the economic development.”

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