THE BASIS POINT

Will Fed hike again March 22 after Feb CPI inflation stays high and bank crisis calms?

 
 

Today, annual February CPI inflation is persistently high at 6% Overall and 5.5% Core, which excludes volatile food and energy costs.

Overall annual CPI is down from 6.3% in January, but Core is the same as January.

And Core is what the Fed follows to make rate policy.

On a monthly basis, Overall CPI was down 10 basis points to 0.4%, but Core CPI was up 10 basis points to 0.5%.

This monthly Core uptick may pressure the Fed to hike again on March 22.

This is especially true if the banking crisis keeps calming down.

Yesterday, bond king Jeff Gundlach said he believes the Fed has to do a 25 basis point hike March 22 to preserve its inflation fighting credibility. He also predicted they’d pause after that.

Before that, Goldman Sachs removed their prediction for a March 22 rate hike, saying 25 basis point hikes would instead come at 3 subsequent Fed meetings.

Regarding the bank crisis, the irony is that Fed hikes are part of reason for bank challenges.

When the Fed hikes as fast as it has after a period of record low rates, it means banks have to pay more on deposits than they’re collecting on loans.

That’s a very broad statement to sum up the banking challenges right now, but it’s the problem in very simplest terms.

But you have to keep fighting inflation.

The Endgame:

Before the SBV-triggered bank crisis, the Fed was predicted to hike overnight bank-to-bank lending rates 50 basis points.

After today’s persistent February inflation and calming bank crisis, it’s more likely the Fed will hike 25 basis points.

The Good News For Mortgage Rates:

Mortgage rates came down from about 7% to about 6.5% as mortgage bonds rallied on the banking crisis.

These bonds are a safe haven during market chaos, and rates drop when bond prices rise in a buying rally.

Today’s inflation data may push mortgage rates up — mortgage bonds are selling on this February inflation data because because inflation erodes future cash flows for bond investors.

But bond investors will be cautious until the bank crisis relief signals become more clear. So hopefully the rate drops we got during the bank crisis peak don’t disappear.

A few key reference links below. Please reach out with questions.

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Reference:

Banking crisis calming down Tue, March 14 as regional banks rally

Goldman Sachs takes March 22 rate cut off the table

Bond king Gundlach thinks Fed hikes March 22 to preserve credibility

All February inflation categories in one chart (CNBC)

February CPI inflation by category all in one chart via CNBC - The Basis Point

 

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