The Fed is set to taper interest rate hikes again as inflation slows

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Federal Reserve officials are set to lower the pace of rate hikes again next week amid signs of slowing inflation, while Friday’s jobs report could show steady demand for workers improving chances of a soft landing for the world’s largest economy. .

Policymakers are preparing to raise the benchmark federal interest rate by a quarter of a percentage point on Wednesday, to a range of 4.5% to 4.75%, mimicking the size of the increase for the second consecutive meeting.

The move comes on the heels of a recent string of data indicating that the Fed’s aggressive campaign to slow inflation is working.

“I expect that we will raise interest rates several more times this year, although, in my opinion, there are certainly days when we raised them by 75 points,” said Patrick Harker, President of the Federal Reserve Bank of Philadelphia, in a speech on January 20. basis every time. . “Increases of 25 basis points would be appropriate going forward.”

The main questions for Fed Chairman Jerome Powell at his press conference after the meeting will be how far the central bank intends to raise interest rates, and what officials need to see before stopping.

Fed officials have made it clear that they also want to see evidence that the imbalances of supply and demand in the labor market are starting to improve.

Employment may have slowed in January, according to economists polled by Bloomberg, who expected employers to add 185,000 jobs compared to 223,000 in December. They see the unemployment rate rising to 3.6%, still near a five-decade low, and they expect average hourly earnings to rise 4.3% from a year ago, a slowdown from the previous month, according to their median estimate.

The Fed will get another important reading on inflation on Tuesday when the Labor Department releases its Employment Cost Index, a broad measure of wages and benefits. Job openings figures for December are also due on Wednesday, as well as a January survey of manufacturers.

What Bloomberg Economics says:

The Fed faces a dilemma: On the one hand, inflation data came in weaker than expected, and activity indicators showed slowing momentum over the past month; On the other hand, financial conditions eased as traders believe that the Fed will soon turn to cutting interest rates. The data will justify a smaller rate hike, but the Fed is likely to see easier financial conditions – while inflation remains uncomfortably above target – as a reason to act hawkish.”

Anna Wong, Eliza Winger, and Neeraj Shah, economists. For the full analysis, click here

Elsewhere, the Fed, the European Central Bank and the Bank of England are likely to raise interest rates by half a point. The day after Eurozone data, Eurozone data is likely to show slowing inflation and a stagnation in the economy. Meanwhile, polls from China may reveal an improvement, Brazil’s central bank may keep borrowing costs unchanged, and the International Monetary Fund will publish its latest World Economic Outlook.

Click here to see what happened last week, and here is our summary of what is going to happen in the global economy.


China returns to work after the Lunar New Year holidays with the focus on the strength of its economy.

Official PMIs released on Tuesday are likely to improve sharply from the dismal December readings, but the manufacturing sector is still not expected to return to a clear expansion. They will be followed by PMIs from across Asia on Wednesday.

Japan releases factory production, retail sales and unemployment figures which may cast doubt on the strength of the economy’s recovery from the summer deflation.

India unveiled its latest budget in the middle of the week as policymakers there try to keep growth on track while curbing deficits.

Export figures from South Korea will provide a check on the pulse of global trade on Wednesday, while inflation numbers the next day will be closely scrutinized by the Bank of Korea.

Trade figures are also due from New Zealand, although unemployment figures will be the main concern for the RBNZ as it considers the possibility of a lower rate hike.

The RBA will watch house prices and retail sales data in the run-up to its interest rate decision the following week.

Europe, Middle East and Africa

Key interest rate decisions will dominate the news in Europe, with the first meetings of the year at the central banks of both the Eurozone and the UK.

Ahead of the European Central Bank on Thursday, key data will call attention to clues to the path of policy. Economists are divided on whether euro zone GDP on Tuesday will show contraction in the fourth quarter – potentially heralding a recession – or whether the region has avoided a recession.

The next day, inflation in the eurozone is expected to slow in January for a third month, although a small minority of forecasters expect an acceleration.

Growth and consumer price data from the region’s three largest economies – Germany, France and Italy – are also due in the first half of the week, making for a busy few days for investors.

The so-called core core measure of inflation may show slight weakness. This metric is drawing more focus from officials who justify more aggressive policy tightening.

The ECB’s own decision will almost certainly include a half-point increase in interest rates and more details of a plan to shed bond holdings built up over years of quantitative easing.

Given President Christine Lagarde’s tendency to hint at future decisions, investors may focus on any forecasts she reveals for March at her press conference, at a time when officials are increasingly bickering over whether to slow down tightening.

The Bank of England’s decision will also be taken on Thursday, and it may also include an interest rate increase of half a point. This would extend the UK’s fastest monetary tightening in three decades. And while inflation has fallen in each of the past two months, it is still five times the central bank’s target of 2%.

Also on that day, the Czech Central Bank is likely to keep interest rates unchanged at the highest level since 1999 and present new inflation forecasts.

Looking south, Ghana is expected to raise borrowing costs on Monday after faster-than-expected price growth in the last two months of 2022 renewed volatility in Cedis, as the country negotiates its debt restructuring plan.

On the same day, Kenyan policymakers prepare to slow down tightening measures after inflation has fallen for two straight months. They are expected to raise borrowing costs by a quarter of a percentage point.

Egypt, where yields on domestic treasury bills have already widened to a record high compared to their emerging market peers, may raise interest rates again on Thursday as inflation rose to a five-year high.

Latin america

Mexico this week became the first economy in the region to achieve October-December production. Most analysts see GDP falling for the third quarter in a row, and more than a few expect a mild recession sometime in 2023.

December remittance data due midweek will likely push the full-year 2022 figure comfortably above $57 billion, handily improving the previous record of $51.6 billion in 2021.

Over the course of three days, Chile publishes at least seven economic indicators, led by a proxy reading of December GDP which is expected to be consistent with the economy heading towards recession.

In Colombia, readings of the January 27 central bank meeting – where policymakers extended a record hike – will be released on Tuesday. At 12.75%, BanRep may be close to its final price.

In Brazil, look for the broadest measure of inflation slowed in January while industrial production continues to suffer.

With inflation now only up to target, this week Brazil’s central bankers had little choice but to keep the key interest rate at 13.75% for the fourth meeting. Economists surveyed by the bank see only 229 basis points of deceleration over the next four years, meaning missing the target for the seventh consecutive year in 2025.

– With assistance from Andrea Dudek, Vince Jull, Benjamin Harvey, Paul Jackson, and Robert Jameson.

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