Inflation Keeps Pressure on Fed Despite Bank CrisisInflationKeepsPressureonFedDespiteBankCrisis

The fallout from Silicon Valley Bank’s demise complicates the Federal Reserve’s path toward fulfilling its mandate to keep prices stable, as policymakers weigh concerns of financial instability against an ongoing battle with inflation. Consumer prices were up 6% in February compared with a year earlier, slowing from a 6.4% pace in January. Meanwhile, wholesale inflation – considered a predictor of future consumer price changes – decelerated to 4.6% from 5.7%. Data have shown that while goods prices are cooling, inflation has maintained a tighter grip on the services sector. The Atlanta Fed’s “sticky” CPI tracker has recorded a 6.7% year-over-year increase in each of the last three months, indicating that price pressures in less-volatile categories such as rent and home furnishings remain strong.

The divergent signals presented by inflation and the bank crisis have fueled market volatility. Shares across the bank sector were on unsteady footing this week, as investors assessed the broader implications of SVB’s collapse for the economy and interest rates. While the Fed is guided by a dual mandate to pursue maximum employment and price stability, investors also look to the central bank to support orderly markets. Forecasts for the Fed’s rate decision next week wavered between a quarter-point hike and a pause, according to interest rate futures. The European Central Bank moved ahead with a rate hike of half a percentage point on Thursday, after the Swiss National Bank announced support for Credit Suisse.

In new commentary, PGIM Quantitative Solutions explores the path ahead for Fed policymakers, who will likely refocus on inflation as market jitters ease. In the short term, markets will continue to gauge the economic ramifications of the bank crisis and how successful regulators have been in so far maintaining confidence in the US banking system.