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How will 2 bank failures affect the Federal Reserve's approach to inflation?

SACHA PFEIFFER, HOST:

New inflation numbers released this morning show a bit of a decline, but they're still a lot higher than the Fed would like. In the past year, the Federal Reserve has raised interest rates eight times to try to curb inflation. But that effort just got much more complicated because of the high-profile collapse of two banks. NPR's Scott Horsley joins us now. Hi, Scott.

SCOTT HORSLEY, BYLINE: Good morning.

PFEIFFER: Scott, the Fed has been very aggressive at rate hikes to try to beat inflation, minimally successful. What did we learn about from today's data?

HORSLEY: Prices are still going up, although not as fast as they were. Annual inflation for the 12 months ending in February was 6%. That's down from 6.4% the month before. Fed Chairman Jerome Powell told lawmakers last week that the price of some goods has leveled off, and there are signs that rents aren't climbing as fast as they were. But the cost of a lot of services, like restaurant meals and airline tickets, are still going up. And because people spend a lot of money on services, that's keeping overall inflation about three times as high as the Fed's long-term target.

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JEROME POWELL: Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.

HORSLEY: And now there's this new bump in the road - the collapse of those two big regional banks in recent days. Some analysts think that's going to force the Fed to be more cautious about raising interest rates when policymakers meet next week.

PFEIFFER: Right. And Scott, explain why those bank collapses could affect the Fed's strategy in battling inflation.

HORSLEY: Well, the Fed is concerned with the stability of the financial system as well as price stability. It's pretty hard to have a working economy if the banking system falls apart. As you said, over the last year, the Fed has been raising interest rates aggressively, and that was one of the factors in the collapse of Silicon Valley Bank. While both the Fed and the FDIC moved quickly to prevent a more widespread bank run, the fallout from these bank failures is still being felt throughout the banking industry. Stocks in a lot of other regional banks have taken a beating in recent days.

Senior economist Michael Pugliese of Wells Fargo says, if that uncertainty continues, then the Fed is going to have bigger concerns on its mind next week than just what we see in today's Consumer Price Index, or CPI.

MICHAEL PUGLIESE: I don't think the CPI is going to be the determinant of whether or not the Fed hikes. I think that's going to be determined far more how the financial markets and just the financial system more broadly does or does not stabilize between now and a week from Wednesday.

HORSLEY: Just a week ago, the Fed was expected to raise interest rates by at least a quarter percentage point next week and maybe half a point. Since these bank failures, though, betting markets now think a half-point increase is off the table next week, and the Fed might skip a rate increase altogether.

PFEIFFER: Let's say the Fed does do a less-than-expected rate hike or no rate hike - what's the likelihood that that ends up making inflation spike again?

HORSLEY: Yeah, that's the high-wire act. The Fed has said many times it doesn't want to repeat the mistakes of the 1970s by letting up on inflation too soon, only to see costs spiral out of control again. But the Fed might have a little bit of maneuvering room here. Just yesterday, the Federal Reserve Bank of New York released a survey that shows people's expectations for inflation a year from now have gone down in the last month. The Fed keeps a close eye on not only where inflation is, but where people think it's going. So that drop in inflation expectations could buy the central bank a little bit of time.

PFEIFFER: That's NPR's Scott Horsley. Scott, thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Sacha Pfeiffer is a correspondent for NPR's Investigations team and an occasional guest host for some of NPR's national shows.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.