Fed Set to Shrink Rate Hikes Again as Inflation Slows

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Federal Reserve officials are set to shift down the pace of interest-rate hikes again in the coming week amid signs of slowing inflation, while Friday’s jobs report may show steady demand for workers that improves the chances of a soft landing for the the world’s largest economy.

Policy makers are poised to raise their benchmark federal funds rate by a quarter percentage point on Wednesday, to a range of 4.5% to 4.75%, dialing back 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 that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Philadelphia Fed President Patrick Harker said in a Jan. 20 speech. “Hikes of 25 basis points will be appropriate going forward.”

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

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

Hiring probably slowed in January, according to economists surveyed by Bloomberg, who projected 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 rose 4.3% from a year earlier, a slowdown from the prior month, according to their median estimate.

The Fed will get another important read on inflation Tuesday when the Labor Department releases the Employment Cost Index, a broad measure of wages and benefits. Figures on job openings for December are also due Wednesday, as well as a January survey of 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, financial conditions have eased as traders believe the Fed will soon switch to rate cuts. 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 hawkishly.”

—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 will each probably raise rates by a half point, after euro-zone data are likely to show slowing inflation and a stagnating economy. Meanwhile, surveys from China might reveal improvement, 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.


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

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

Japan releases factory output, retail sales and jobless figures that may cast doubt on the strength of the economy’s rebound from a summer contraction.

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

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

Trade figures are also due from New Zealand, though jobless figures will be the main concern for the RBNZ as it mulls the possibility of smaller rate hikes.

The Reserve Bank of Australia will be keeping an eye on house prices and retail sales data in the run-up to its rate decision the following 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 euro zone and the UK.

Before the ECB on Thursday, key data will draw attention for clues on the path for policy. Economists are split on whether GDP for the euro area on Tuesday will show a contraction in the fourth quarter — potentially heralding a recession — or whether the region avoided a slump.

The next day, euro-zone inflation in January is anticipated to have slowed for a third month, though a…

Read More: Fed Set to Shrink Rate Hikes Again as Inflation Slows

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