The US Economy Is Already Seeing The Effects Of The Interest Rate Hike And Inflation Is Expected To Fall Again
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Fed Chairman Jerome Powell gave no policy guidance at Tuesday's panel discussion in Stockholm, and with other Fed officials saying their next moves will depend on the data, investors are very focused on the US CPI data.
Forecast
The YoY CPI report is expected to fall to 6.2% from 6.5% previously, but the monthly CPI change (M/M) is expected to increase to 0.4%, from 0.1%. Core CPI Y/Y is also expected to drop to 5.5% from 5.7%.
Source: investing.com
Deflation?
US inflation rates rose to their highest levels since the 1980s last year, thanks to a string of geopolitical tensions and pandemic-related economic decisions. Now, we’re watching a delicate dance between the Fed, unemployment and interest rates unfold, aiming to tame the beast.
Inflation has decreased in the US six months in a row, a sign that the Fed’s aggressive interest rate-raising approach is working.
However, the Fed is expected to stick to rate increases after the lowest levels of unemployment in 50 years were revealed.
Last week, the Fed raised interest rates by 25 basis points and said it saw signs of disinflation, but the hit jobs report shook investors as they feared policymakers could stay hawkish for longer.
Fed Chairman Powell reiterated his belief that disinflation is underway in his speech this week.
Employment
An employment report last week showed U.S. job growth accelerated sharply in January while the unemployment rate hit a more than 53-1/2-year low of 3.4%, pointing to a tight labor market that could be a headache for the Fed.
The labor market has an interesting role to play. When many people are out of work, employers have plenty of choice in whom to hire and don't have to push workers to pay higher wages. This keeps wage inflation low.
Right now, it should be the other way around, but we're getting mixed signals instead. While the labor market is hot, wage growth is declining: average hourly earnings fell from 4.8% in December to 4.4% a month later.
It is quite difficult for the Fed to decide whether to continue raising interest rates when unemployment is extremely low and wage growth is not adequate.
What's next from the Fed?
After a massive effort to rein in inflation in 2022, the Fed has started to take control of the situation. Rate hikes have slowed down recently, with the Fed announcing a quarter-point rate hike last week. Interest rates are currently within the target range of 4.5% to 4.75%.
Still, the Fed appears to be cautiously optimistic about inflation.
While no one is sure of the exact number of inflation in 2023, most agree that it will continue to fall. Moreover, we have yet to see the full effect of the staggering increase in interest rates. As this affects the cost of credit, consumer spending and exchange rates, we will only see the impact of interest rate increases in 2022 only this year. This can mean a slower economy, fewer jobs and less spending.
The Fed is still sticking to its target of bringing inflation down to 2%. How fast that happens depends on a lot of moving parts we haven't seen yet.
Source: investing.com
