Fed's inflation efforts may be bearing fruit

The recent US economic data suggest that the Federal Reserve's efforts to fight inflation may be working.

Jobless claims increased in a report released Thursday, while on Wednesday, the increase in the consumer price index (CPI) fell below 5 percent in April for the first time in two years.

The number of Americans filing new claims for unemployment benefits jumped to an 18-month high last week. Initial claims for state unemployment benefits increased 22,000 to a seasonally adjusted 264,000 for the week ended May 6, the highest reading since October 2021.

"The Fed looks closer to winning the war on inflation today, but it risks losing the war on keeping the economy afloat and away from the shoals of recession," said Christopher Rupkey, chief economist at FWDBONDS in New York.

Economists say jobless claims in a 270,000-300,000 range would signal a deterioration in the labor market.

Layoffs, which were initially concentrated in the technology and housing sectors, appear to be spreading to other industries as companies prepare for weak demand.

Still, despite the increase in unemployment filings reported Thursday, the jobs report released on April 28 showed an acceleration in job and wage growth in April as the unemployment rate stood at a 53-year low of 3.4 percent.

"Business labor demand has been gradually cooling, and today's initial claims reading hints at potentially a more abrupt slowing," said Michael Feroli, chief US economist at JPMorgan in New York.

As for the CPI, in the 12 months through April it increased 4.9 percent. That was the smallest year-on-year rise since April 2021 and followed a 5 percent jump in March.

Nevertheless, inflation remains too strong, with the report from the Labor Department on Wednesday showing monthly consumer prices rising solidly because of high rents as well as rebounds in the costs of gasoline and used cars.

"Inflation is still sticky; I don't think that the Fed is going to look at this and cut rates, or heave an especially big sigh of relief," said Priya Misra, head of global rates research at TD Securities, reported The New York Times. "Not so fast. We can't draw the conclusion that the inflation problem is over."

Scott Anderson, chief economist at Bank of the West in San Francisco, said the inflation report "supports the case for the Fed to seriously contemplate a pause in rate hikes in June, but does not support any near-term rate cuts". The stock market loves low interest rates.

The annual CPI peaked at 9.1 percent in June 2022, when it posted its largest increase since November 1981.

"On balance, inflation is still too high, and it is not going to fall back to 2 percent if it increases 0.4 percent a month," said Chris Low, chief economist at FHN Financial in New York.

The Fed raised its benchmark overnight interest rate by another 25 basis points to the 5 percent-5.25 percent range last week and signaled it may pause its fastest monetary policy-tightening campaign since the 1980s. The Fed has raised its policy rate by 500 basis points since March 2022.

The monthly core CPI was lifted by prices of used cars and trucks, which increased 4.4 percent, the first gain since June 2022.

US producer prices rebounded modestly in April, leading to the smallest annual increase in producer inflation in more than two years. The producer price index (PPI) for final demand rose 0.2 percent last month, the Labor Department said on Thursday.

In the 12 months through April, the PPI increased 2.3 percent. That was the smallest year-on-year rise since January 2021 and followed a 2.7 percent advance in March.

Meanwhile, around 113 of the largest US lenders will bear the cost of replenishing a deposit insurance fund that was drained of $16 billion by recent bank failures, the Federal Deposit Insurance Corporation (FDIC) said Thursday.

The FDIC will apply a "special assessment" fee of 0.125 percent to uninsured deposits of lenders in excess of $5 billion, based on the amount of uninsured deposits a bank held at the end of 2022, the FDIC has proposed.

While the fee applies to all banks, lenders with more than $50 billion in assets would cover over 95 percent of the cost, the agency said. Banks with less than $5 billion in assets would not pay any fee.

The top 14 US lenders will need to pay an estimated $5.8 billion a year, which could erode their earnings per share by a median 3 percent, Credit Suisse analyst Susan Roth Katzke wrote.

Banks usually pay a quarterly fee to finance the fund, but the FDIC said the special levy was necessary to cover high costs it incurred after Silicon Valley Bank and Signature Bank failed in March.

Both banks, which had extremely high levels of uninsured deposits, abruptly failed after depositors fled amid concerns over their financial health. Regulators declared them critical to the financial system, allowing the FDIC to backstop all deposits in a bid to stop the contagion spreading.

The recent seizure of First Republic Bank and sale to JP Morgan Chase is expected to cost that fund another $13 billion.

Reuters contributed to this story.