FOMC Likely To Take The 25bp The Market Gives Them Post-CPI

Pretending for a moment that we weren't in the midst of a US banking crisis, the February inflation report would have cemented at least another 25bp March Fed hike with probably at least a 50/50 chance of a half-point raise as hinted by Powell last week.

• Going into next week's FOMC meeting, there is certainly no evidence of monetary tightening producing a decisive reversal in inflation pressures yet.
• There was some category-by-category volatility contributing to the slightly-above-expected core print (both overall and the narrower non-housing core services metric eyed by the Fed), which blunts a decisively hawkish takeaway.
• But now that we're through the key pre FOMC data, and given that there is an ongoing banking crisis, a 25bp hike seems like the central outcome for next week, though that's as things stand today and not a foregone conclusion given financial stability developments. A 50bp hike or a cut look unlikely now.
• It's possible the FOMC decides to pause with a pledge to resume hiking if appropriate, though judging from the last press conference, that doesn't seem to be Powell's favored approach.
• And with inflation still way above-target, combined with the strong Feb jobs report, there will still be many FOMC participants eyeing the risks of undertightening being greater than those of overtightening at this juncture - even with the banking shock tightening financial conditions.
• So if current pricing (80% prob of a 25bp hike) persists the next few days, the FOMC will take what the market is now "giving them" in a cautionary 25bp raise with a pledge of a true meeting-by-meeting approach going forward as they assess the lagged impact of existing tightening.