Fed to cut rate hikes again as inflation slows

Fed to cut rate hikes again as inflation slows

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

Policymakers are poised to raise their benchmark overnight interest rate by a quarter of a percentage point to a range of 4.5% to 4.75% on Wednesday and are backing the size of the hike for a second straight meeting.

The move would follow a slew of recent data suggesting the Fed’s aggressive campaign to slow inflation is working.

“I expect we’ll hike a few more times this year, but I think the days of raising rates by 75 basis points are certainly over,” said Patrick Harker, president of Philadelphia Fed, in a speech on Jan. 20. “25 basis point hikes will be appropriate going forward.”

The key questions for Fed Chair Jerome Powell at his post-meeting press conference will be how much higher the central bank intends to hike rates and what officials need to see before pausing.

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

Hiring figures are likely to have slowed in January, according to economists polled by Bloomberg, who forecast employers added 185,000 new jobs, compared with 223,000 in December. They expect the unemployment rate to rise to 3.6%, still near a five-decade low, and expect average hourly wages to have risen 4.3% year-on-year, a month-on-month slowdown corresponds to their mean estimate.

The story goes on

The Fed will have another key update on inflation on Tuesday when the Labor Department releases the Employment Cost Index, a broad measure of wages and benefits. December job vacancy figures are also due on Wednesday, as is a January survey of manufacturers.

What Bloomberg Economics says:

“The Fed faces a dilemma: on the one hand, inflation data has come in weaker than expected and activity indicators have shown slowing momentum over the past month; On the other hand, financial conditions have eased as traders believe the Fed will soon start cutting rates. The data would justify smaller rate hikes, but the Fed will likely see easier financial conditions – while inflation remains uncomfortably above target – as reason to turn hawkish.”

—Anna Wong, Eliza Winger and Niraj Shah, economists. For a full analysis click here

Elsewhere the day after, the Fed, European Central Bank and Bank of England are all likely to hike rates by half a point each after euro-zone data is likely to show slowing inflation and a sluggish economy. Meanwhile, surveys out of China may show improvement, Brazil’s central bank may leave borrowing costs unchanged and the International Monetary Fund is set to release its latest global economic forecast.

Click here to see what happened last week and below is our rundown of what’s coming in the global economy.

Asia

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

Official Purchasing Managers’ Indices, due out on Tuesday, are likely to improve significantly from December’s dismal data, but manufacturing is still not expected to return to significant expansion. PMIs from across Asia will follow on Wednesday.

Japan releases factory production, retail sales and unemployment figures that could cast doubt on the strength of the economy’s recovery from a summer contraction.

India unveils its latest budget midweek as policymakers there try to keep growth on track while containing the deficit.

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

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

The Reserve Bank of Australia will be keeping an eye on house prices and retail sales data ahead of its interest rate decision next week.

Europe, Middle East, Africa

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

In front of the ECB on Thursday, key data will attract attention after pointing out the path of politics. Economists are divided on whether Tuesday’s fourth-quarter GDP for the euro zone will show a contraction — possibly heralding a recession — or if the region has avoided a slump.

Next day, euro-zone inflation is expected to have slowed for a third month in January, although a small minority of forecasters are predicting 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 it a busy day for investors.

The so-called core inflation is likely to weaken only slightly. This benchmark attracts more attention from officials who justify further aggression against policy tightening.

The ECB decision itself will almost certainly include both a half-point rate hike and further details of the plan to reduce bond holdings built up over years of quantitative easing.

Given President Christine Lagarde’s penchant for hinting at future decisions, investors could focus on any outlook she reveals in her news conference for March, at a time when officials are increasingly at odds over whether to slow tightening .

The BOE decision will also take place on Thursday and may also include a half-point hike in interest rates. That would extend the UK’s fastest monetary tightening in three decades. While inflation has fallen in each of the last two months, it remains five times the central bank’s target of 2%.

On this day, too, the Czech central bank is likely to leave interest rates unchanged at their highest level since 1999 and present a new inflation outlook.

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

On the same day, Kenyan policymakers are poised to slow tightening after inflation eased for two straight months. They are expected to increase the cost of borrowing by a quarter of a percentage point.

Egypt, where yields on local Treasury bills have already widened to a record high versus peers in emerging markets, may hike rates again on Thursday as inflation hits a five-year high.

Latin America

Mexico this week becomes the first of the region’s major economies to announce Oct-Dec production. Most analysts expect GDP to fall for the third straight quarter, and quite a few are forecasting a mild recession sometime in 2023.

December remittances data, due mid-week, should comfortably push the full-year 2022 figure to over $57 billion.

Chile will release at least seven economic indicators over the course of three days, led by December’s GDP proxy reading, which is expected to coincide with an economy tipping into recession.

In Colombia, the announcement of the January 27 central bank meeting – which saw policymakers extend a record hike campaign – will be released on Tuesday. At 12.75%, BanRep may be nearing its final rate.

Look for the broadest measure of inflation in Brazil, which slowed in January as industrial production continues to struggle.

With inflation now only slowly falling towards target, Brazilian central bankers have little choice this week but to leave interest rates on hold at 13.75% for a fourth meeting. Economists polled by the bank see a slowdown of just 229 basis points over the next four years, which would mean missing the target for the seventh straight year in 2025.

–Assisted by Andrea Dudik, Vince Golle, Benjamin Harvey, Paul Jackson and Robert Jameson.

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