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Tomorrow’s CPI inflation report for February will show whether the Federal Reserve faces a very difficult task in bringing down inflation without crashing the economy (and/or the banking system) or whether the job is simply impossible.

Right now economists are pointing toward impossible. The annual inflation rate is likely to have come down in February from January but the month-to-month trend is likely to be flat. Which means that inflation has stopped declining with the annual rate well above the Fed’s 2% target rate.

The Inflation Now estimate from the Cleveland Federal Reserve projects that all items (what I frequently call “headline inflation”) will be up 0.54% month to month in February. Core inflation, that is inflation without food or energy prices, is projected to be up 0.45% from January.

That would put the annual headline inflation rate at 6.21% and the annual core rate at 5.54%. That core rate, the important number here to the Federal Reserve for its inflation fight, would be basically unchanged.

And if this is what the actual report says about inflation, then the Fed has a between a rock and a hard place choice.

The central bank can raise interest rates again–by 25 or 50 basis points–because inflation is proving very sticky.

But with the collapse of Silicon Valley Bank so fresh in so many minds a move to raise interest rates is sure to generate a storm of criticism. And to put more stress on what is currently a very stressed banking system. After all, that bank collapsed because higher interest rates from the Federal Reserve crush the value of the bank’s portfolio of Treasury bonds and left the bank with no alternative but to sell a big portfolio of bonds at a huge loss and then try to raise cash in a stock offering.

Or the Fed can decide that the banking system needs a break from the stress of interest rate increases and hold rates where they are. That would be tantamount to admitting that the fight against inflation is done and that inflation has won with the annual core inflation rate still near 5.5%.

My opinion is that the Fed will try to split the difference with a 25 basis point interest rate increase–rather than the 50 basis points that everyone (myself included) thought was likely just last week. That would provide notice to the financial markets that the Fed is still serious about reducing inflation but that the central bank is aware of how fragile banks, bank investors, and bank customers are feeling at the moment.

The Fed meets next on March 22. Besides an announcement on interest rates, the Fed will also release a new (the last one was in December) Dot Plot projection of its estimate of inflation, interest rates, unemployment, and GDP growth for the end of 2023 and 2024.