That the Fed took the decision to enact a further 25 basis point rate hike, after the banking turmoil triggered by SVB, is instructive as to how far inflation remains over what would be considered a ‘comfortable level’ of approximately 2 per cent.
The Fed’s preferred ‘super core rate’ (PCE services less energy and housing) remains stubbornly high at +4 per cent.
To intensify chairman Jerome Powell’s heartburn, falling borrowing costs combined with sharply rising interest income [on the back of a massive ‘excess savings’ pool, threaten a mini reacceleration of the economy that is set to feed through to the inflation data over the coming months.
Cumulative excess savings have not yet been depleted, which also lends credence to the prevailing market narrative prior to the SVB news, that forward earnings from corporate America would not be as adversely affected as earlier feared.
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