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Federal Reserve officials will cut the pace of rate hikes again in the coming week amid signs of easing inflation, while Friday’s jobs report may show steady demand for workers, raising the chances of a soft landing for the world’s largest economy increased.
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%, reversing the size of the increase 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 will raise rates a few more times this year, but I think the days of raising them 75 basis points at a time are definitely over,” said Patrick Harker, president of the Philadelphia Fed in a January 20 speech. . . “Increases of 25 basis points will be appropriate going forward.”
Key questions for Fed Chairman Jerome Powell at his post-meeting press conference will be how much higher the central bank plans to raise rates, and what officials need to see before they pause.
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 likely slowed in January, according to economists polled by Bloomberg, which predicted employers would 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 expect median hourly wages to be up 4.3% from a year earlier, a slowdown from the previous month, according to their average estimate.
The Fed will get another key reading on inflation on Tuesday when the Labor Department releases the Employment Cost Index, a broad measure of wages and benefits. Job vacancy figures for December are also expected on Wednesday, as is a survey of manufacturers in January.
What Bloomberg Economics says:
“The Fed faces a dilemma: On the one hand, inflation data has been 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 make rate cuts. The data would warrant smaller rate hikes, but the Fed is likely to see easier financial conditions – while inflation remains uncomfortably above target – as a reason to act aggressively.”
—Anna Wong, Eliza Winger and Niraj Shah, economists. Click here for a full analysis
Elsewhere, the day after, the Fed, European Central Bank and Bank of England are likely to raise rates by half a point each, after Eurozone data is likely to show slowing inflation and a stagnant economy. Meanwhile, studies from China could show improvement, Brazil’s central bank could leave borrowing costs unchanged and the International Monetary Fund will release its latest global economic forecasts.
Click here for what happened last week, and below is our recap of what’s to come in the global economy.
Asia
China is returning to work after the Lunar New Year holiday with the strength of its economy in sight.
Official PMIs expected on Tuesday are likely to improve sharply after December’s dismal data, but the manufacturing sector is still not expected to return to marked expansion. They are followed by PMIs from across Asia on Wednesday.
Japan is releasing factory production, retail sales and unemployment data that may cast doubt on the strength of the economy’s recovery from a summer contraction.
India unveils its latest budget mid-week as policymakers there try to keep growth on track while keeping the deficit in check.
Export data from South Korea will provide a pulse on global trade on Wednesday, while inflation data will be closely monitored by the Bank of Korea the following day.
Trade data is also coming out of New Zealand, although unemployment numbers will be the main concern for the RBNZ as it considers the possibility of smaller rate hikes.
The Reserve Bank of Australia will monitor house prices and retail sales ahead of its rate decision next week.
Europe, Middle East, Africa
Major 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.
Ahead of the ECB on Thursday, key data will draw attention to clues on the path for policy. Economists are divided on whether GDP for the Eurozone will contract in the fourth quarter on Tuesday — possibly heralding a recession — or whether the region has avoided a slump.
The following day, inflation in the Eurozone is expected to have slowed for a third month in January, 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 expected in the first half of the week, making it a busy few days for investors.
The so-called core underlying measure of inflation may show only a slight weakening. This indicator attracts more attention from officials who justify further aggression in the field of policy tightening.
The ECB’s decision itself will almost certainly include both a half-point rate hike and more details about 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 might want to focus on the outlook she reveals in her press conference for March, at a time when officials are increasingly at odds over whether or not to slow the tightening. .
The BOE decision will also take place on Thursday and may also include a half-point rate increase. That would extend the UK’s fastest monetary tightening in three decades. While inflation has fallen each over the past two months, it remains five times the central bank’s 2% target.
Also on that day, the Czech central bank will probably leave 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 and renewed volatility in the cedi as the country negotiates a restructuring plan for its debt.
The same day, Kenyan policymakers are poised to slacken tightening after inflation eased for two months in a row. They are expected to raise borrowing costs by a quarter of a percentage point.
Egypt, where yields on local treasury bills have already reached a record relative to peers in emerging markets, could raise 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 produce from October to December. Most analysts see GDP fall for a third straight quarter and more than a few are predicting a mild recession sometime in 2023.
December remittance data expected mid-week is likely to push the full 2022 figure comfortably above $57 billion, easily beating the previous record of $51.6 billion set in 2021.
Chile is releasing at least seven economic indicators over the course of three days, led by December’s GDP proxy reading, which is expected to be consistent with an economy tipping into recession.
In Colombia, the readout from the January 27 central bank meeting – where policymakers extended a record campaign – will be posted on Tuesday. At 12.75%, BanRep may be approaching its final rate.
Look for the broadest measure of inflation in Brazil, which slowed in January while industrial production continues to struggle.
With inflation making only glacial progress towards returning to target, Brazil’s central bankers have little choice this week but to keep the policy rate at 13.75% for a fourth meeting. Economists polled by the bank see just 229 basis points of slowdown over the next four years, which would mean missing the target for a seventh straight year in 2025.
–With assistance from Andrea Dudik, Vince Golle, Benjamin Harvey, Paul Jackson, and Robert Jameson.
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