After inflation peaked at a 40-year high in 2022, the Federal Reserve Bank has made it its mission to curb inflation to a targeted 2% rate, using its power over interest rates as its primary tool. After eight successive interest hikes in the past year, the Fed’s aggressive monetary policy seems to be working, albeit slower than expected.
According to the latest Consumer Price Index released by the Labor Department, prices on goods and services decelerated for the eighth straight month in February, increasing 6% compared to the year prior and down from 6.4% in January. This is the smallest annual gain since September 2021. Rent continues to be the biggest driver of inflation, surging 0.8% monthly and 8.8% over the past year. In addition, grocery prices are still climbing higher but more slowly, rising by 0.3% from January and 10.2% over the past year. The so-called core CPI, which excludes the more volatile prices on food and energy items, increased 0.5% since January, with an annual increase sliding from 5.6% to 5.5%.
Despite encouraging numbers, the Federal Reserve Bank is still hesitant to revisit its rate-hiking policy, wary of the possibility of halting its efforts too early to have a lasting impact on inflation. Their upcoming decision (to be announced at the next meeting on March 21-22) is further complicated by the latest development in the banking sector and the most recent labor report.
Conflicting Data
One of the primary drivers behind inflation’s resistance to the Fed’s hawkish economic policy is a strong labor market which remains very tight and has led to soaring wages despite highly publicized layoffs in the tech and finance industry. However, wage growth seems to have cooled down in the past month. Average hourly earnings for private-sector workers rose 4.6% over the past 12 months, but the pace has slowed to an annualized 3.6% over the past three months.
In addition, the recent failure of two of the 30 largest U.S. banks, by assets, adds to concerns that there may be repercussions from an overly aggressive interest rate hike on the already fragile economy. Although Federal Chair Jerome Powell had hinted at another relatively large 50 bps interest rate increase days before the bank failures, the possibility of a smaller 25 bps or, according to some experts, no interest rate increase, is now on the table.
Tune in next issue for further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
