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APRIL 12, 2023

U.S. INFLATION EASED IN MARCH

This morning the Labor Department released the March Consumer Price Index (CPI) data and it showed that inflation has eased due to the Federal Reserve’s interest rate hikes having a more significant effect. The CPI, which is a commonly used indicator of the prices of goods and services in the US economy, increased by 0.1% in the month, lower than the anticipated 0.2% as estimated by Dow Jones. The index also recorded a 5% rise from a year ago, slightly lower than the estimated 5.1%.

While the 5% rise in inflation is the least rapid annual growth in consumer prices since May 2021, it remains substantially higher than the Federal Reserve’s target of 2%. The Fed has been gradually increasing interest rates in an attempt to reduce inflation. However, there is a risk that the central bank could push the economy into a recession by increasing rates too rapidly or excessively.

MIXED VIEWS AMONG FED OFFICIALS

The U.S inflation report for March had some promising news, but there is disagreement among Federal Reserve officials on the central bank’s next policy move. John Williams, President of the New York Fed, claims that more work is necessary, while Austan Goolsbee, President of the Chicago Fed and a voting member, has urged caution and patience. He also suggests that policymakers may need to hold off on any further rate hikes for now.

GLOBAL MONETARY POLICYMAKERS PRIORITIZE INFLATION CONTROL DESPITE BANKING INDUSTRY STRUGGLES

Recent stress in the banking sector has prompted the International Monetary Fund (IMF) to warn of possible economic risks. Nevertheless, three of the four major central banks are still considering raising interest rates, which could lead to a recession. In the latest World Economic Outlook, IMF officials lowered their growth forecast and warned of further downturns, particularly from the recent failures of Silicon Valley Bank and Signature Bank in the U.S. and the forced merger of Credit Suisse. The IMF predicts plausible scenarios where banking problems and tighter credit may slow global economic growth or possibly stall it altogether. Despite this, monetary policymakers are keen to combat high inflation and view it as the greater risk. The Bank of England’s chief economist, Huw Pill, emphasized the need for monetary tightening to deliver on returning inflation to target.

BIG BANKS URGED TO INCREASE RESERVES

Some of the biggest U.S. banks, including JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America, are setting aside $100 million each to bolster reserves for First Republic Bank. The banks are following accounting rules that require banks to stockpile reserves to cover potential losses that could occur. This move was meant to show support and confidence in the banking system, however, the need of setting reserves aside show that there are risks involved in parking money with First Republic. Representatives have declined to comment, but analysts believe that a sale for First Republic is unlikely without falling into government receivership due to the company’s losses.

LOWER MORTGAGE RATES INCREASE HOMEBUYING

Mortgage rates in the U.S. have decreased for the fifth week, reaching their lowest point in the last two months. This drop in rates has strengthened demand for buying a home, with a 7.8% increase in the Mortgage Bankers Association’s index of mortgage applications – the highest since mid-January. The current low rates are due to investors seeking security in Treasury bonds as a result of several banks collapsing. However, buying a home still poses a challenge due to limited inventory and the relatively high cost of borrowing. The overall number of mortgage applications has risen to the highest level since February, but refinancing applications only slightly increased.

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