Headline CPI came in today as expected at 0.4%, however core inflation (ex food and energy) came in slightly higher at 0.5% versus the estimated 0.4% increase. Before the Silicon Valley Bank failure and currently ongoing banking rout unfolded last week, Jerome Powell said he was leaving “ongoing” hikes and even a larger 50 bps hike on the table, and that the FOMC would consider the “totality” of data (CPI, retail sales, etc.) before making a rate decision on March 22. That “totality” was quickly overwhelmed by a banking sector cataclysm and ensuing rescue by the Fed, FDIC and US Treasury on Sunday. Even after a slightly hotter-than-expected CPI report, the Fed is now expected only to raise rates by 25 basis points more and then stop.
Below I show Bloomberg’s World Interest Rate Probabilities (WIRP) tool capturing the market’s expectations for US Fed Funds following Powell’s hawkish testimony in front of Congress last Monday. At the time the market was expecting an additional three and a half 25 basis point hikes, culminating in 5.5 percent in September.
WIRP as of Monday March 6, 2023
A week later, the market had radically altered its expectations for the Fed Funds rate path, thanks to the failure of three banks, Silvergate, Silicon Valley Bank, and Signature Bank, as well as the realization that other banks were vulnerable to losses in their bond portfolios, due in part to the Fed’s aggressive rate hike trajectory. According to the the WIRP chart below, yesterday before the CPI report the market was only expecting one 25 basis point hike, followed by cuts.
