The US Federal Reserve (Fed) will publish the minutes of its last meeting last year on Wednesday (4th), further explaining why the central bank is worried that strong inflation will persist and make the terminal interest rate higher than originally expected.
After the Federal Open Market Committee (FOMC) met last month, policymakers projected higher-than-expected inflation through the end of 2023, and there was surprisingly broad support for the view that interest rates would have to rise above 5 percent to tame inflation.
Policymakers see inflation at around 3.1% in 2023, up from a September estimate of 2.8%, according to the median estimate in the Summary of Economic Projections (SEP), Chairman Jerome Powell said. , the central bank’s pessimism on inflation has been linked to continued strength in the labor market, especially in service prices.
“It’s surprising that the central bank raised its inflation forecast because it sounds like most economists see little change in inflation, and I even think they’re going to lower their forecasts,” said Kevin Cummins, chief U.S. economist at NatWest Markets.
Priya Misra, head of interest rate strategy at TD Securities, said the outlook for rates is quite hawkish and well ahead of market expectations. She will look for signs from the minutes of the December meeting that the Fed has changed its stance on striking a balance between inflation and employment, and she believes the big question is how high the central bank can tolerate rising unemployment.
Investors now expect the Fed to return to raising rates by a quarter at its Jan. 31-Feb. 1 meeting, with the federal funds rate expected to peak just below 5 percent in mid-2023.
Anna Wong, chief U.S. economist at Bloomberg, said the minutes of the December meeting could suggest that it was concerns that the labor market wasn’t cooling fast enough that led 17 of the 19 FOMC members to expect interest rates to end this year above 5%. %, which would be a sharp turnaround from November’s dovish minutes.
The December non-agricultural employment report, which will be released this Friday (6th), is also an important factor in determining the interest rate policy in February. According to a Bloomberg survey, the market predicts that non-agricultural employment will slow down to 200,000 in December, the unemployment rate is estimated to remain unchanged at 3.7%, and the wage growth rate is estimated to decrease by 5% annually.
Mark Spindel, chief investment officer at MBB Capital Partners, said he would look for clues about the Fed’s risk appetite for higher-than-expected unemployment this year and next. The Fed previously predicted that the U.S. unemployment rate would rise to 4.6% by the end of 2023
Spindel believes that if the Fed implements the austerity plan, it will be even more difficult for the US to achieve a soft landing for the economy this year.
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