United States: the Fed on the verge of losing control of inflation


Fed Chairman Jerome Powell in Washington on March 8, 2023.

Inflation is falling, but at 6% in February, it is still too high. And the trap closes on the Fed, the American central bank. The institution chaired by Jerome Powell must increase its rates, currently set above 4.5%, to continue to fight against the general rise in prices. But this policy led to the bankruptcy of the bank of California Silicon Valley Bank (SVB), whose bond portfolio had lost more than 15%. Between inflation and financial stability, will the Fed have to choose?

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The American consumer price index for February, published on Tuesday March 14, does not provide a decisive answer. Over one year, inflation reached 6%, against 6.5% in January, and 5.5% excluding energy and food. The fall is significant compared to the record of 9.1% reached in June 2022. But month by month, the trend remains too strong compared to the 2% target that the central bank says it wants to reach: prices have still increased by 0.4% between January and February, and this figure reached 0.5% excluding energy and food. Concern remains high for housing prices (+0.8%), while the rise in other services is accelerating again. Inflation is “still too high and shows no signs of falling”deplores Harvard economist Jason Furman.

In this context, what will the Fed do after the next meeting of its monetary policy committee, on March 22? Before the bankruptcy of the SVB, it had started on a rise of half a point to try to regain control of the situation after poor inflation figures. “I have all respect for Powell, but the fact is that we have lost control of inflation a bit”, had criticized the boss of JP Morgan, Jamie Dimon. The good performance of employment and the persistence of inflation in February should have reinforced it, but the collapse of the SVB has suddenly made its task almost inextricable.

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Collapse of market rates

The impact of this bankruptcy, the most serious since 2008, is more complicated to assess than it seems: apparently, it will prevent the Fed from raising its rates, because it would be taking the risk of aggravating the losses. financial institutions that bought treasury bills during the free money period and sometimes lost more than 15% in value (when rates go up, the value of bonds goes down until they approach the yield of new market rate, the rate of return being the ratio of the amount of interest payments to the price of the bond).

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