Fed may pause rate hikes after bank collapse, economists predict

WASHINGTON. The government’s inflation report released on Tuesday is expected to show that price increases in the United States remained chronically high in February, putting the Federal Reserve in an unusually difficult position.

It was believed that the Fed would definitely raise its benchmark interest rate by at least a quarter of a point when it met next week. Many analysts were even expecting an aggressive half-point advance if the February report on Tuesday points to higher inflation again. But that was before two major bank failures last weekend and a series of emergency measures the Fed unveiled to try and bolster confidence in the financial system.

With banking stocks falling on Monday and fears of further financial volatility sweeping the markets, most economists now expect the Fed to pause rate hikes next week to avoid further volatility at a challenging time for the banking system.

At the same time, inflation is still far above what the Fed wants. Economists estimate that a report released Tuesday will show that consumer prices rose 0.4% from January to February, according to a survey of economists by data provider FactSet. This will be slightly less than the increase from December to January, but still too fast to meet the Fed’s annual inflation target of 2%.

Compared to last year, headline inflation rose 6% in February compared with a year-on-year jump of 6.4% in January, economists forecast. They also calculated that so-called base prices, which exclude volatile food and energy prices, are up 5.5% from last year. This will be only slightly below the January annual rate of 5.6%.

Ian Hatzius, chief economist at Goldman Sachs, said Goldman now believes Fed policymakers will put a hold on rate hikes next week. Previously, Goldman had forecast a quarter-point gain. In a note to clients, Hatzius said the Fed is now more focused on calming the banking sector and financial markets than fighting inflation.

“We would be surprised if, just a week after they made huge efforts to maintain financial stability, politicians would risk undermining their efforts by raising interest rates again,” Hatzius wrote in a separate note on Monday.

Hatzius predicted that if the Fed does put a hold on rate hikes this month, it will likely resume it at its next meeting in May. Ultimately, he still expects the Fed to raise its key rate, which affects many consumer and business loans, to around 5.4% this year from the current 4.6%.

The Fed may receive some unintended help to fight inflation due to the fallout from the collapse of Silicon Valley Bank and New York-based Signature Bank. In response, many small and medium-sized banks may decide not to lend in order to strengthen their finances. Lower lending could help cool the economy and slow inflation.

The possibility of a Fed pause highlights a dramatic shift in the national financial system and economy in just one week. Fed Chairman Jerome Powell told the Senate Banking Committee last Tuesday that if hiring and inflation continue to pick up, the Fed is likely to hike rates at this month’s meeting by a substantial half point. This would mean re-accelerating the Fed’s efforts to tighten credit. The central bank raised the base rate by a quarter of a point in February, by half a point in December and by three-quarters of a point four times before.

Testifying to a House committee the next day, Powell warned that no final decision had yet been made on what the Fed would do at its March meeting. However, the government said on Friday that employers added 311,000 jobs last month. This was a potential sign of continued high inflation and led to forecasts for a half-point increase at the Fed meeting next week.

However, later that day, the Silicon Valley Bank collapsed, imposing a whole new set of problems on the Fed.