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 continue and make the final interest rate higher than originally expected.
After the Federal Open Market Committee (FOMC) met last month, policymakers forecast higher-than-expected inflation by the end of 2023, and there was surprisingly widespread support for the view that interest rates would have to rise above 5 per cent to tame inflation.
Policymakers see inflation around 3.1% in 2023, up from September’s estimate of 2.8%, according to the median estimate in the Summary of Economic Outlook (SEP), Chairman Jerome Powell said, the central bank’s pessimism on inflation linked to continued strength in the labor market, particularly in services prices.
“It’s surprising that the central bank has raised its inflation forecast because it sounds like most economists don’t see much change in inflation, and I even think they’re going to lowering their outlook,” said Kevin Cummins, chief US economist at NatWest Markets.
Priya Misra, head of interest rate strategy at TD Securities, said the outlook for rates was quite dovish and well ahead of market expectations. She will be looking for signs from the minutes of the December meeting that the Fed has changed its stance on achieving 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 January 31-February 1 meeting, with the federal funds rate expected to peak just below 5 percent in mid-2023.
Anna Wong, chief US economist at Bloomberg, said the minutes of the December meeting may suggest that concerns that the labor market was not cooling fast enough led 17 of the 19 FOMC members to expect interest rates to end this year above 5 % %, which would be a sharp change from the tame minutes of November.
The December non-agricultural employment report, which will be released this Friday (6th), is also an important factor in determining interest rate policy in February. According to a Bloomberg survey, the market expects non-agricultural employment to slow 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% in annual.
Mark Spindel, chief investment officer of MBB Capital Partners, said he would be looking for clues about the Fed’s risk appetite for higher-than-expected unemployment this year and next. The Fed previously forecast the US unemployment rate to 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 United States to ensure a soft landing for the economy this year.
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