The Silicon Valley Bank closure looks like it will be just a blip for the markets, as the Fed and FDIC appear ready to act to limit the fall-out. Nevertheless, the bank's failure could make Fed officials more inclined to hike by 25 BPs than 50 BPs at the March 21-22 FOMC Meeting. While the bank's failure may overstate the overall risks to the banking system or economy, it stands as a reminder that some feature of the economy tends to "break" when the Fed tightens monetary policy. Besides this reminder, it is possible the economy's fundamentals will argue for a 25 BP hike. Last week's key US economic data -- the February Employment Report and January Job Openings -- kept open the door for one. Although the consensus estimate of this week's February CPI is on the high side from the Fed's perspective, a lower print cannot be ruled out.
Consensus looks for +0.4% m/m for both Total and Core CPI -- well above the annualized 2% Fed target. Lower prints for both are conceivable, but this is far from certain. A slowdown in Owners' Equivalent Rent (OER), declines in Used Car Prices and Airfares, and slowdowns in a number of other components (after start-of-year January hikes) could do it.
1. Although the Fed expects OER to slow sharply in the second half of the year, its slowdown in January raised the possibility that the CPI's rent survey may catch up to the actual declines in rents more quickly. To be sure, OER may have to slow to +0.5% m/m from January's +0.7% to have a noticeable impact, which could be asking a lot of it.
2. While news stories have highlighted the bounce in the Manheim Used Car Price Index in February, there are several reasons to be cautious about mapping it into the CPI measure of Used Car Prices. First, the Manbeim Index measures wholesale prices, and there is a lag before they show up at the retail level. Second, seasonal factors subtract from Used Car Prices in the February CPI but add to the Manheim figure. Third, the Manheim Index has tended to move in a wider range than the CPI measure.
3. Airfares in February are uncertain. They have been on a downtrend for the past few months, even though the PPI measure of airfares has begun to rise. The stabilization of fuel costs have helped keep them down. Some airlines have boosted wage rates sharply, however.
4. There is little historical evidence that the February Core CPI tends to slow from the January pace. One reason may be that a number of CPI components are sampled on a bi-monthly basis, so start-of-year price hikes show up in the sample for 2-3 months.
Away from the current inflation rate, the Fed should feel encouraged by signs that US economic growth is slowing. Thanks to a decline in the Nonfarm Workweek, Total Hours Worked dipped in February. And, the Unemployment Claims data rose noticeably in the latest week. Although Payroll growth remained strong in February, a lot of the increase appears to be catch-up from the pandemic. This should not continue indefinitely, and the decline in Job Openings in January suggests this is the case. Warm weather helped boost job growth in February, as well as in January. Payback for the warm winter should be seen in a jobs and GDP slowdown in the next few months. This week's reports on February Retail Sales and Manufacturing Output (part of Industrial Production) will likely underscore a weaker outlook. This evidence will probably not be enough to stop the Fed from raising its projected endpoint of the Fed Funds Rate in this tightening cycle, but it suggests the markets should be cautious in taking an upward-revised projection at face value.
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