Rate Hikes Up In The Air Thanks To New Economic Data

Mixed economic indicators released this week may stall the Federal Reserve’s plans for another round of aggressive rate hikes.

Retail sales fell 0.4% in February as consumers strained under high inflation, Commerce Department data released Wednesday showed. Spending fell in eight of the thirteen groups analyzed, with furniture and department stores seeing the biggest dips.

Bar and restaurants saw sales fall by 2.2%, the most in more than a year.

But a surprise decline in producer prices provided a glimmer of hope that inflation may be cooling. Wholesale prices were down 0.1%, upending the Dow Jones prediction of a 0.3% increase. The index still increased YOY, but by less than expected.

Both of these reports come just a day after the Consumer Price Index posted a 0.4% month-over-month increase, pushing the annual inflation rate to 6%.

Though the 12-month CPI rate is now the lowest since September 2021, analysts say the data are evidence of stubborn inflation that will be difficult to fix. 

On top of that, Silicon Valley Bank’s stunning implosion last week has created further confusion.

Analysts think the central bank may have trouble ahead of its monthly meeting, scheduled for March 21 to 22.

“The 0.5% [month-over-month] rise in core consumer prices last month adds to the evidence that inflation remains stubbornly high, but the ongoing fallout from the SVB crisis over the coming days is still likely to have a bigger bearing on what happens at next week’s FOMC meeting,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, said in a note.

“The Federal Reserve is running out of good choices,” Quadratic Capital Management’s Nancy Davis wrote in a note. “They need higher rates to fight inflation, but higher rates could continue to spark problems in the banking sector.”

Analysts are mixed on where the Fed will go from here.

Chairman Jerome Powell had hinted at greater rate hikes in the future, but that was prior to SVB’s collapse and new inflation data. Some experts now expect the central bank to either push another small increase or pause rate hikes entirely. Economists at Nomura Securities are even saying a rate cut may be on the table.

“In reaction to looming financial stability risks, we now expect the Fed to cut rates,” Nomura economists Aichi Amemiya and Jacob Meyer wrote in a note. “We also expect the Fed to stop quantitative tightening.”

Housing accounts for a primary chunk of inflation data.

Shelter costs were up 0.8% month-over-month in February and 8.1% YOY. The CPI measures housing with a delay, however, meaning inflation could be overstated now and soften later when cooling home prices are introduced.

While price appreciation is beginning to correct, affordability remains at its lowest point in a decade. The median price of an existing home sold in January was $359,000, up 1.3% YOY. With rates as they are, the median US household needs to spend about 42.9% of its income to afford a median-priced house, well above the cost-burdened threshold of 30%.

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