Stubbornly high inflation headache for Fed

STUBBORNLY high inflation gave the Federal Reserve a fresh headache yesterday as it battles to shore up the US banking system.

As the fallout from the collapse of Silicon Valley Bank in California and Signature Bank in New York continued, official figures showed inflation in the US hit 6pc in February.

That was down from 6.4pc in January and a peak of 9.1pc last Summer, but still well above the Fed’s 2pc target.

The Fed has been aggressively hiking interest rates to try to bring inflation down and hawkish recent comments from chairman Jerome Powell ( pictured) had left investors expecting another big rise next week.

But markets have since been betting that the collapse of SVB last Friday may have given it reason to pause. That is because the California lender’s demise stemmed from the slump in value of its bond holdings, which was the result of the rate hikes.

Fears that further hikes could weaken more US lenders create a dilemma for the Fed – and was dubbed a ‘battle of fire and ice’ by Ted Pick, co-president of US banking giant Morgan Stanley.

Speaking at the bank’s European Financials Conference, Pick said: ‘This is part of the process of the knob being turned to tighten financial conditions to make sure that we are on our way to normalising a higher interest rate world. But there might well be surprises.’

Andrew Hunter, deputy chief US economist at Capital Economics, said the latest figures ‘add to the evidence that inflation remains stubbornly high’.

But he added: ‘The ongoing fallout from the SVB crisis over the coming days is still likely to have a bigger bearing on what happens at next week’s meeting.’

Only last week, Powell warned interest rates would need to move higher and possibly faster than expected because inflation was proving more persistent than central bank officials anticipated.

Brian Jacobsen, senior investment strategist at Allspring Global Investments, said: ‘The Fed is stuck between a rock and a hard place. Inflation met expectations, but is still uncomfortably hot. Financial stresses are intense. Prudence would dictate they pause, but couple it with a stern warning that if inflation trends don’t improve that they might need to hike more.’