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Federal Reserve officials will ease the pace of interest rate hikes again next 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 the largest economy in the world.
Policymakers are set to raise their key federal funds rate by a quarter of a percentage point on Wednesday, to a range of 4.5% to 4.75%, while reducing the size of the hike by a second consecutive 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 hike rates multiple times this year, although, in my view, the days of raising rates 75 basis points at a time are certainly over,” Philadelphia Fed Chairman Patrick Harker said in a speech. of 20 January. . “In the future, increases of 25 basis points will be appropriate.”
The key questions for Fed Chair Jerome Powell in his post-meeting news conference will be how much higher the central bank intends to raise rates and what officials need to see before stalling.
Fed officials have made clear they also want to see evidence that supply-demand imbalances in the job market are starting to improve.
Hiring likely slowed in January, according to economists polled by Bloomberg, who forecast employers added 185,000 jobs from 223,000 in December. They see the unemployment rate rise to 3.6%, still close to a five-decade low, and expect average hourly earnings to have risen 4.3% year-over-year, a slowdown from the previous month, according to the their median estimate.
The Fed will get another important reading on inflation on Tuesday when the Labor Department releases the Labor Cost Index, a broad measure of wages and benefits. Job opening data for December is also due Wednesday, as is a January survey of manufacturers.
What Bloomberg Economics says:
“The Fed faces a dilemma: on the one hand, inflation data is weaker than expected and activity indicators have shown a slowdown over the past month; on the other hand, financial conditions have eased as traders believe the Fed will move into rate cuts soon. The data would justify 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. For a full analysis, click here
Elsewhere, the day after the Fed, the European Central Bank and the Bank of England are likely to hike rates by half a point each, after euro-zone data is likely to show slowing inflation and a stagnant economy. Meanwhile, polls from China could reveal improvements, Brazil’s central bank could keep borrowing costs unchanged, and the International Monetary Fund is due to release its latest global economic forecasts.
Click here for what happened last week, and below is our summary of what’s coming into the global economy.
Asia
China is back to business after the Lunar New Year holiday with the strength of its economy in the spotlight.
The official PMIs released on Tuesday are likely to improve sharply from December’s dismal readings, but the manufacturing sector is not yet expected to return to sharp expansion. They will be followed by PMIs from across Asia on Wednesday.
Japan releases data on industrial production, retail sales and unemployment that could cast doubt on the strength of the economy’s rebound after the summer contraction.
India unveils its latest budget mid-week as policy makers try to keep growth on track while limiting the deficit.
Export data from South Korea will provide a pulse check on global trade on Wednesday, while inflation data the following day will be closely scrutinized by the Bank of Korea.
Trade data is also expected from New Zealand, although unemployment data will be the main concern for the RBNZ as it assesses the possibility of small rate hikes.
The Reserve Bank of Australia will keep an eye on house prices and retail sales data ahead of its rate decision next week.
Europe, Middle East, Africa
Major 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 Thursday’s ECB, key data will attract attention for clues to the policy path. Economists are divided over whether GDP for the euro area on Tuesday will show contraction in the fourth quarter – potentially heralding a recession – or whether the region has avoided a crisis.
The next day, euro-zone inflation in January is expected to slow for a third month, although a small minority of forecasters expect it to accelerate.
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 underlying fundamental measure of inflation may show only a slight weakening. That indicator is attracting more attention from officials justifying further assault on policy tightening.
The ECB decision itself will almost certainly contain both a half-point rate hike and more details on the plan to unwind bond holdings accumulated over years of quantitative easing.
Given President Christine Lagarde’s penchant for hinting at future decisions, investors may focus on whatever prospects she divulges for March at her press conference, at a time when officials are increasingly disagreeing on whether to slow down the tightening.
The BOE’s decision will also take place on Thursday and may also include a half point rate hike. This would extend the UK’s fastest monetary tightening in three decades. While inflation has eased in each of the past two months, it remains five times above the central bank’s 2% target.
Also on that day the Czech central bank is likely to keep rates unchanged at the highest level since 1999 and present a new inflation outlook.
Looking south, Ghana is expected to pick up 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 debt restructuring plan.
On the same day, Kenyan policy makers are poised to ease the tightening after inflation fell for two consecutive months. They are expected to raise borrowing costs by a quarter of a percentage point.
Egypt, where the yield on local Treasuries has already risen to a record high against peers in emerging markets, could hike rates again on Thursday with inflation at a five-year high.
Latin America
Mexico this week becomes the first of the region’s major economies to report October-December production. Most analysts see GDP declining for the third consecutive quarter and not a few predict a mild recession in 2023.
December remittance data due midweek is likely to comfortably push the figure for the full year 2022 above $57 billion, easily bettering the previous record annual haul of $51.6 billion set in 2021.
Chile over the course of three days released at least seven economic indicators, led by the December GDP proxy reading which should be consistent with an economy entering a recession.
In Colombia, the reading from the central bank’s January 27 meeting, in which policymakers extended a record hike campaign, will be released on Tuesday. At 12.75%, BanRep could get close to the terminal rate.
In Brazil, look for the broader measure of inflation that eased in January as industrial production continues to struggle.
With inflation now making only glacial progress back to target, Brazilian central bankers have no choice but to hold the key rate at 13.75% for a fourth meeting this week. Economists polled by the bank see just 229 basis points of slowdown over the next four years, which would mean missing the target for the seventh consecutive year in 2025.
–With assistance from Andrea Dudik, Vince Golle, Benjamin Harvey, Paul Jackson and Robert Jameson.
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