Ceteris paribus....

All other things being equal, the February CPI data released this morning would have given the Federal Reserve every reason to raise interest rates, possibly by a full 50 basis points, at next week's FOMC meeting. But as an early economics teacher of mine was fond of saying, "the ceteris are not always necessarily paribus". The past weekend's turmoil in the banking sector may well force the Fed to hold back, at least for this month. 

Headline CPI rose 0.4 percent in February, down from a 0.5 percent gain in the prior month. This served to lower the year-on-year rate to 6.0 percent, the lowest since September 2021. The data were broadly in line with expectations. The fact that the annual number fell significantly even though the monthly print was well above the Fed target range is further evidence of the influence of the "base effect", which will help drive the annual number lower until at least mid-year.  More than 70 percent of the increase in headline CPI was the result of a rise in the shelter component, while a fall in energy prices exerted some downward pressure on the aggregate figure. 

The data for core CPI (excluding food and energy) were slightly less encouraging.  The index rose 0.5 percent in the month, its fastest increase since September 2022. The year-on-year increase was 5.5 percent, once again held lower by the base effect. 

In themselves these numbers do not appear to justify any pause in the Fed's tightening cycle. Both the year-on-year numbers and the monthly increases point to inflation staying well above the 2 percent target. It remains the case that the Fed's rate moves are not addressing the actual causes of inflation, but that has not deterred the FOMC to this point and it is unlikely that it would be any deterrent this month. 

The SVB situation is, however, a different matter, especially as it is becoming clear that the bank's collapse was in large measure due to the Fed's past rate hikes, which served to make Treasuries the riskiest item on the balance sheet. It is certain that many (if not most) other banks are carrying significant losses on their Treasury holdings at this time, and the Fed will not wish to exacerbate the problem until the dust settles. If things calm down in the net few days, a 25 basis point rate hike is till possible on March 22, but a Canadian-style "conditional" pause is now a real possibility.