Inflation, interest rates and bank failure: the dilemma of the United States to move away the dark clouds of the economy

Inflation in the United States decreased slightly, as announced this Wednesday, and this new data in the current context of the banking crisis and the fear of general contagion, puts the focus on the

on interest rates , a central factor in the failures of Silicon Valley Bank and Signature, which have shaken the financial system.

The new inflation data could make the Federal Reserve's interest rate policy, due to be taken at a board meeting next week, more

: price increases showed signs of being persistent, which would generally require higher rates, but now the new reality of the banking system is driving calls for caution.

The Bureau of Labor Statistics reported that prices increased 6% in February compared to a year earlier.

That's notably down from the June peak of 9.1%, but it's a moderate downside from January's year-over-year rise of 6.4%.

The new reading suggests that inflation

and is still one of the main threats to households, businesses and the economy in general.

Higher housing costs weighed heavily in the latest numbers, contributing to more than 70 percent of the monthly increase.

Prices

Food, recreation and home furnishings also increased in price, although the price of gas and other energy costs fell.

US Treasury Secretary Janet Yellen on Capitol Hill in Washington on March 10, 2023. AP Photo

Wall Street applauded the steady, albeit modest, decline in inflation.

, after suffering sharp losses on Monday that later recovered.

The Stock Market is seduced by the prospect of an early end to the Fed's monetary adjustment. The Dow Jones thus gained 1.06%, the Nasdaq technology 2.14% and the S&P 500 1.68% broad index.

In addition to the price news, the markets are beginning to process the quick measures that the US authorities took after the collapse of the banks and

that guaranteed deposits to all clients and ensured that the US banking system remains strong.

However, the dark clouds about the contagion effect

and the comparisons with the 2008 crisis

These days there will be a strong tussle in the Federal Reserve.

For a year after the rate was at 0 during the pandemic, the Fed has waged an aggressive fight to rein in inflation, raising rates at the fastest pace in decades, rising as much as 0.75 percentage point at a time over several months. .

With prices falling, it fell to 0.5 points in December and the last rise in February was lower, 0.25 points,

always seeking a balance between curbing inflation without cooling too much the economy or the labor market.

As the Fed leader, Jerome Powell, had said in recent days that the economy had cooled “only partially”, many economists estimated that this month the fight against inflation would intensify and it would rise again half a point.

A view of Silicon Valley Bank offices in Wellesley, Massachusetts.

Photo Reuters

what's coming

The Fed's efforts have become even more complicated in recent days, following the collapse of the banks.

In emergency meetings this weekend, the Fed and other regulators took sweeping steps to shore up deposits at those banks, but it's unclear whether that will be enough to avert a broader crisis.

Many economists now expect the Fed

, or stop them altogether, when it meets next week.

The collapse of Silicon Valley Bank is, in some ways, a byproduct of the Fed's aggressive efforts to raise borrowing costs after years of near-zero interest rates.

For years, start-ups and technology companies – the SVB's main clients – benefited from a low interest rate environment that allowed access to cheap money.

But as the Fed has rapidly raised borrowing costs,

Consulted by

, Steven Kyle, Professor of Economics at Cornell University and expert in US macroeconomic policy, said that "the big problem for the Fed is that, until now, it seems to have completely ignored the possibility that its aggressive efforts to slowing down the economy could have systemic consequences.

Now that we have had two of the biggest bank failures in history in quick succession,

He explained that “as more increases in interest rates can cause more banks to get into trouble, they will be more careful in the coming months, since they are still not satisfied with the level of inflation because, although today's numbers were encouraging, 6% is still

For the expert, “the Fed wants to prevent the situation from getting worse.

They have already shown their unlimited power in these areas by stabilizing the situation as fast as they could.

It is telling, however, that the Fed has had to take over SVB directly instead of arranging for another, larger bank to buy it, as they tend to prefer.

That means that other banks did not want SVB's loan portfolio in their portfolios, even at unfavorable prices,

and the risk of decisions that got them into trouble.”

“The Fed will be forced to at least slow its rate hikes.

Many of us (including me) want a pause until we've given current rates time to kick in, but I'm guessing the Fed won't completely abandon its current rate-hike policy.

That means we may continue to see increases, but most likely only a quarter point (0.25) at a time."

Beyond the Fed, the expert adds a political component to the situation: “It is also worth noting that deregulation under the Trump administration is also partly to blame for this: if midsize banks had continued to be held to the same strict standards than the big banks, there would almost certainly have been more warnings about these problems and

PB​

look also

Banking crisis in the United States: Europe fears contagion from Silicon Valley Bank

Silicon Valley bank is not Lehman