Expectations For 0.5% Interest Rate Hike Vanish Ahead Of Critical CPI Data Expected To Shape Fed Decision

The Federal Reserve will have to weigh cross currents when it considers the magnitude of its next rate hike, and an all important indicator is due this week.

What To Know: The U.S. Labor Department is set to release Consumer Price Index data for February at 8:30 a.m. ET Tuesday. 

Economists are expecting headline CPI to come in at 6% for February, which would be down from 6.4% in January. Expectations for core CPI, which excludes volatile energy and food prices, are sitting at 5.5% versus 5.6% in the prior month.

The CPI inflation will come in the wake of a jobless claims number that increased by 21,000 for the week ending March 4 to 211,000 and topped average economist estimates of 195,000. 

That hotter-than-expected unemployment filings number was a step in the right direction, but was immediately followed by a hot non-farm payrolls report, which pushed back against the idea that Fed policy might be starting to impact what has been a relentlessly strong labor market.

Related Link: Job Market Stays Hot, Unemployment Ticks Higher: US Adds 311K Jobs In February, Exceeding Economist Expectations

Why It Matters: The Fed has downshifted its pace of rate hikes in recent months, but chances for a more aggressive 0.5% hike steadily climbed last week as the Federal Reserve's semiannual Monetary Policy Report and comments from Fed Chair Jerome Powell continued to fan the flames.

The market was projecting about a 40% chance of a 0.5% hike at the start of last week, but that number nearly doubled as the week progressed, according to CME Group data. It has since collapsed and projections are now teetering between a 0.25% hike and a pause, suggesting a 0.5% hike is completely off the table.

Why The Drastic Shift? The bank run that led to the collapse of SVB Financial Group SIVB has spooked markets, and although customers will be made whole, uncertainty remains about the standing of the financial sector. 

Check This Out: Why Silicon Valley Bank Collapsed: A Simple Explainer

The Fed has been willing to aggressively hike rates, especially considering the continued strength of the economy and the labor market. But SVB's crumbling suggests that the Fed might have finally broken something in its fight against inflation: banks. 

Powell noted in his exchange with Congress last week that he would be paying close attention to Tuesday's CPI number. He highlighted the importance of the number and noted the committee will "scrutinize" the data. 

"We have not made any decision about the March meeting. We're not going to do that until we see the additional data," Powell said. 

SPY Price Action: The SPDR S&P 500 SPY was volatile on Monday as investors shifted attention to Tuesday's CPI report.

The SPY was up 0.29% at $387.08 at the time of writing, according to Benzinga Pro.

Photo via Shutterstock.