What is the level of dissent within the Federal Reserve?

What is the level of dissent within the Federal Reserve?

Investors will follow the Federal Reserve’s release of minutes from its February meeting on Wednesday to learn how much disagreement there has been over the recent decision to slow the pace of interest rate hikes.

At its meeting that ended on February 1, the US Federal Reserve decided to slow the pace of its rate hikes again, raising interest rates by 0.25 percentage points after a series of 0.75 and 0.75 percentage points last year .5 percentage points. At the time, the decisions made sense because inflation and the US economy as a whole had cooled.

But since the February meeting, the US has reported that employers hired 500,000 people in January, nearly triple the forecast; that consumer prices slowed less than expected; and that retail sales showed that the US consumer remained resilient.

All of this suggests that the Fed’s rate-hiking work is not over, and may require even more aggressive action than its members had forecast.

Disagreements within the Fed should therefore show members’ willingness to resume the mantle of aggressive policymaking. Two Fed officials — Loretta Mester, chair of the Cleveland Fed, and James Bullard, chair of the St. Louis Fed — said last week they supported a larger 0.5 percentage point hike at the February meeting.

Evidence of widespread dissent could convince the market that the Fed may be willing to hike rates higher and for longer than indicated in the central bank’s last survey of officials – the so-called “dot plot” in December. Kate Duguid

Will China cut interest rates?

China’s government has emphasized prioritizing growth this year, and on Monday markets will focus on the next potential flashpoint: the so-called policy rate, which serves as the country’s interest rate benchmark.

Economists expect the People’s Bank of China to leave the one-year LPR, the main short-term interest rate, and the five-year LPR, which underpins mortgage lending, unchanged at 3.65 percent and 4.3 percent, respectively.

This is mainly because the PBoC did not adjust interest rates on medium-term lending facilities, which serve as the floor for the two benchmarks, this month.

Banks can and have previously changed these rates without prior intervention from the PBoC. However, economists think that is unlikely this time as local governments are already introducing measures to support the country’s struggling real estate sector. In January, banks in nearly 20 major cities cut their minimum mortgage rates for first-time buyers on government orders, easing pressure on the central bank to cut rates.

Iris Pang, chief China economist at ING, said such government policies would “result in banks not having enough leeway to squeeze net interest margins,” making surprise moves in LPRs even less likely. Hudson Lockett

Will European business sentiment improve?

Falling wholesale gas prices and easing inflation are expected to boost business sentiment across Europe this month.

The Flash S&P Purchasing Managers’ Index, a measure of month-on-month activity, is expected to show that business growth in the euro zone accelerated in February after showing an expansion in January for the first time in seven months.

Economists polled by Reuters are forecasting that the euro-zone composite PMI, released on Tuesday, will rise to 50.5 in February from 50.3 in the previous month, buoyed by stronger activity in the services sector.

Ellie Henderson, economist at Investec, said that “the optimism at the beginning of this year has continued into this month.”

Contrary to expectations of a deep downturn forecast just a few months ago, many economists now believe the eurozone economy will avoid a recession this winter, helped by lower gas prices and slowing inflation.

Preliminary data, calculated without figures for Germany, showed that euro-zone inflation fell more-than-expected to 8.5 percent in January, from 9.2 percent in December. Analysts calculated that the final figure to be released on Thursday would be revised to 8.7 percent, but that would still be the lowest level in seven months.

The UK PMI read is also likely to improve, with the Composite Index expected to rise to 49 this month from 48.5 last month. This would still be below the 50 mark, suggesting that the majority of companies are reporting a drop in activity attributed to ongoing weakness in manufacturing.

“While the operating environment will undoubtedly be challenging throughout 2023, ongoing confidence in an economic recovery in 2024 should continue to support business sentiment in the UK,” Henderson said. Valentina Romei

https://www.ft.com/content/31bf39a5-9a11-489a-92d0-c83d77fcb2cd What is the level of dissent within the Federal Reserve?

Adam Bradshaw

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