- US inflation remains stubbornly high, with core prices rising at an accelerated pace of 0.5% in February.
- Markets are currently focused on the banking crisis, but attention spans are infamously short.
- When the dust settles, the Fed is set to continue raising rates.
A semi-Lehman moment? That seems to be the fear in financial markets in recent days, with a sliver lining – a lower path of interest rates. Yet if Silicon Valley Bank's spectacular failure is contained, then the good news for the economy melts that silver lining. The fresh inflation gives the Federal Reserve a fresh reason to raise interest rates.
The Core Consumer Price Index (Core CPI) rose by 0.5% in February, above 0.4% which was reported for January and expected for now. While Core CPI decelerated to 5.5% yearly, it is still substantially above the Fed's 2% target.
Inflation has peaked – but that is not news anymore. The issue is that price rises are not falling, just becoming sticky. Moreover, the peak in yearly inflation remains at risk if Core CPI comes out above 0.3%.
Four natural days and only two trading days have passed since SVB collapsed, triggering fears. As time passes by and no additional institution needs help, confidence is rising about the resilience of the banking system.
If the Fed meeting were today, it would leave rates unchanged due to the ongoing uncertainty about banks. However, a week is a long time in markets. If the upcoming weekend is quiet – no scrambling to save any banks – there is a good chance of a 25 bps rate hike.
The Fed raises rates until something breaks. But if that something is only SVB, stubbornly high inflation means more hikes. That means a stronger US Dolllar, and eventually a fall in the stocks, once the relief rally related to no new bank failures ends.
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