How will the 2 bank failures affect the Federal Reserve’s approach to inflation? : NPR

The Fed will be watching closely on Tuesday when a new report card on inflation is released. The Fed’s efforts to fight inflation have been complicated by recent stresses in the banking sector.


New inflation numbers released this morning show a slight decline, but they are still much higher than the Fed would like. The Federal Reserve has raised interest rates eight times in the past year in an effort to curb inflation. But that effort was only made that much more difficult by the high-profile collapse of two banks. NPR’s Scott Horsley joins us now. Hi Scott.


Pfeiffer: Scott, the Fed has been very aggressive in raising interest rates in an attempt to beat inflation, with minimal success. What did we learn from today’s data?

HORSLEY: Prices are still rising, though not as fast as they have been. In the 12 months ending in February, annual inflation was 6%. That was down from 6.4% the previous month. Fed Chairman Jerome Powell told lawmakers last week that some commodity prices have fallen and there are signs that rents are not rising as fast as they have been. But the cost of many services, such as restaurant meals and airline tickets, is still rising. And because people are spending a lot of money on services, that’s keeping headline inflation about three times higher than the Fed’s long-term target.


JEROME POWELL. Although inflation has moderated in recent months, the process of returning inflation to 2% has a long way to go and is likely to be bumpy.

HORSLEY: And now there is this new collision on the way. the collapse of those two major regional banks in recent days. Some analysts believe that will make the Fed more cautious about raising interest rates when policymakers meet next week.

Pfeiffer: That’s right. And Scott, explain why these bank failures might affect the Fed’s anti-inflation strategy.

HORSLEY: Well, the Fed is concerned with the stability of the financial system as well as price stability. It’s pretty hard to have a functioning economy if the banking system collapses. As you said, the Fed has been aggressively raising interest rates for the past year, and that was one of the factors in the collapse of the Silicon Valley bank. Although both the Fed and the FDIC moved quickly to prevent more bank runs, the effects of these bank failures are still being felt throughout the banking industry. Shares of many other regional banks fell in recent days.

Michael Pugliese, senior economist at Wells Fargo, said if that uncertainty continues, the Fed will have bigger concerns next week than just what we see in today’s consumer price index, or CPI.

MICHAEL PUGLISE. I don’t think the CPI will be the determinant of whether the Fed will hike or not. I think it will be determined more by how the financial markets and just the financial system more broadly stabilizes or doesn’t stabilize until a week from Wednesday.

HORSLEY: Just a week ago, the Fed was widely expected to raise interest rates by at least a quarter of a percentage point next week and perhaps as much as half a point. However, given these bank failures, betting markets now believe a half-point hike is off the table next week and the Fed may skip a rate hike altogether.

Pfeiffer: Suppose the Federal Reserve makes a smaller than expected rate hike or no rate hike at all; what is the likelihood that this will eventually lead to inflation again?

HORSLEY. Yes, it’s high-wire action. The Fed has repeatedly said it doesn’t want to repeat the mistakes of the 1970s, letting inflation drop too early, only to see spending spiral out of control again. But the Fed may have a little wiggle room here. Just yesterday, the Federal Reserve Bank of New York released a survey showing that people’s inflation expectations have declined in the past month, one year on. The Fed is watching not just where inflation is, but where people think it is going. So that decline in inflation expectations could buy the central bank a little time.

Pfeiffer: That’s NPR’s Scott Horsley. Scott, thank you.

HORSLEY: You’re welcome.

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