Are Fed Rate Hikes Over? February’s Cooling Inflation Brings Hope

Mortgage News March 24, 2023

In February, the Consumer Price Index (CPI) recorded a year-over-year increase of 6% before seasonal adjustment, lower than the 6.4% increase in January, providing hope that the Federal Reserve may pause its federal funds rate hikes. The BLS data showed that the rise in the CPI was largely driven by significant increases in transportation services, energy services, and food indexes. However, energy commodities, gasoline, and used cars and trucks experienced a decline in prices. On a monthly basis, the CPI increased by 0.4% after rising by 0.5% in January, with transportation services and shelter contributing to the increase. Meanwhile, utility gas service and fuel oil declined.

Previously, monetary policy observers predicted a 50 basis point increase in the federal funds rate in the upcoming Fed meeting. However, following the recent collapse of Silicon Valley Bank and Signature Bank, some believe that another rate hike could be counterproductive. These bank failures have triggered a liquidity crisis in American banks, leading to concerns about managing the current turbulence. To address this, the US Department of Treasury, the Fed, and the Federal Deposit Insurance Corporation announced the approval of interventions in Silicon Valley Bank and Signature Bank, as well as depositors’ access to all their money and additional funding for banks.

In terms of housing costs, the February data showed that housing costs for homeowners, which account for more than 30% of the inflation index, remained higher than the overall figure. This is despite reports of rents and home prices falling across many markets.

Overall, the slower increase in the CPI in February provides some hope that the Federal Reserve may pause its federal funds rate hikes. However, the recent bank failures and liquidity crisis highlight the challenges faced by the Fed in managing the current economic turbulence.

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