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The Fed will shrink rate hikes again when inflation slows




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

Policymakers are poised to raise their benchmark federal funds rate by a quarter of a percentage point on Wednesday, to a range of 4.5% to 4.75%, dialing back the size of the hike for a second straight meeting.

The move will follow a string of recent data that suggest the Fed̵[ads1]7;s aggressive campaign to curb inflation is working.

“I expect we will raise interest rates a few more times this year, but in my view, the days of raising them 75 basis points at a time have certainly passed,” Philadelphia Fed President Patrick Harker said in a Jan. 20 speech. . “Increases of 25 basis points would be appropriate going forward.”

Key questions for Fed Chair Jerome Powell at the press conference after the meeting will be how much higher the central bank intends to raise interest rates, and what officials need to see before pausing.

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

Hiring likely slowed in January, according to economists surveyed by Bloomberg, who estimated employers added 185,000 jobs compared with 223,000 in December. They see the unemployment rate ticking up to 3.6%, still near a five-decade low, and expect average hourly earnings to rise 4.3% from a year earlier, down from last month, according to their median estimate.

The Fed will get another important reading on inflation on Tuesday when the Labor Department releases the Employment Cost Index, a broad measure of wages and benefits. Figures on vacancies for December will also come on Wednesday, as well as a January survey among manufacturers.

What Bloomberg Economics Says:

“The Fed faces a dilemma: On the one hand, inflation data has come in softer 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 move to cut interest rates. The data will justify smaller rate hikes, but the Fed is likely to see easier economic conditions – while inflation remains uncomfortably above target – as a reason to act hawkish.”

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

Elsewhere, the day after the Fed, the European Central Bank and the Bank of England are likely to raise interest rates by half a point each, after euro zone data is likely to show slowing inflation and a stagnant economy. Meanwhile, surveys from China may reveal recovery, Brazil’s central bank may keep borrowing costs unchanged and the International Monetary Fund will publish its latest global economic forecasts.

Click here for what happened last week, and below is our wrap of what’s coming up in the global economy.

Asia

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

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

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

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

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

The trade figures also come out of New Zealand, although unemployment numbers will be the biggest concern for the RBNZ as it considers the possibility of smaller rate rises.

The Reserve Bank of Australia will keep an eye on house prices and retail sales data in the run-up to next week’s interest rate decision.

Europe, Middle East, Africa

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

Ahead of the ECB on Thursday, key data will draw attention for clues on the path for policy. Economists are divided over whether eurozone GDP on Tuesday will show a contraction in the fourth quarter – potentially signaling a recession – or whether the region avoided a downturn.

The following day, eurozone inflation in January is believed to have eased for a third month, although a small minority of forecasters predict 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 underlying core measure of inflation may show only a slight weakening. This gauge draws more attention from officials who justify further aggression on policy tightening.

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

Given President Christine Lagarde’s penchant for hinting at future decisions, investors may focus on any outlook she reveals for March at her press conference, at a time when officials are increasingly divided over whether to slow down austerity.

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

Also on that day, the Czech central bank will probably keep interest rates unchanged at the highest level since 1999 and present new inflation prospects.

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

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

Egypt, where yields on local T-bills have already risen to record highs compared with other emerging markets, could raise interest rates again on Thursday with inflation at a five-year high.

Latin America

Mexico will this week become the first of the region’s major economies to produce from October-December. Most analysts see GDP declining for the third consecutive quarter, and more than a few predict a mild recession sometime in 2023.

Data for December remittances due midweek are likely to push the full 2022 figure above $57 billion, easily bettering the previous record annual remittance of $51.6 billion set in 2021.

Chile over the course of three days releases at least seven economic indicators, led by the December GDP proxy reading that is expected to be consistent with an economy tipping into recession.

In Colombia, the reading of the central bank’s January 27 meeting – where policymakers extended a record campaign – will be released on Tuesday. With 12.75%, BanRep can approach the terminal interest rate.

In Brazil, look for the broadest measure of inflation to ease in January as industrial production continues to struggle.

With inflation now only returning to target, Brazilian central banks this week have little choice but to keep the policy rate at 13.75% for a fourth meeting. Economists surveyed by the bank see just 229 basis points of decline over the next four years, which would mean missing the target for a seventh consecutive year in 2025.

–With assistance from Andrea Dudik, Vince Golle, Benjamin Harvey, Paul Jackson and Robert Jameson.

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