Fed Rate Pause Is a Tough Call After Inflation Reaccelerates

An acceleration in monthly core consumer prices seems likely to reinforce the Federal Reserve’s determination to raise interest rates to fight inflation, though the decision on next week’s move will be a tough call amid ongoing concern about financial turmoil.

Jerome Powell, chairman of the US Federal Reserve.

February’s consumer price index, excluding food and energy, increased 0.5% last month and 5.5% from a year earlier, according to Bureau of Labor Statistics data out Tuesday. Economists see the gauge as a better guide to underlying inflation than the headline measure. CPI overall climbed 0.4% in February and 6% from a year earlier.

The challenge for the Fed now is how to prioritize inflation that is still far too high with growing financial stability risks in the unraveling of Silicon Valley Bank. Authorities stepped in over the weekend to provide a new backstop for banks to protect uninsured depositors.

“This CPI print underscores how they don’t have the luxury to sit around and wait,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “The weekend intervention was also meant to contain the financial crisis to create room for continued monetary tightening. That way, they don’t want to pick between financial and price stability.”

While tentative signs of stability appeared to be returning to banking stocks that have been hammered in the aftermath of the collapse of SVB, Chair Jerome Powell and his colleagues may worry that it’s too soon to tighten policy again while the fallout from the failure is still difficult to judge.