The Fed’s December policy meeting minutes are due on Wednesday and may provide hints about the central bank's tightening path. After four consecutive increases of 75 basis points (bps), the Fed raised rates by 50 bps in December. Although this represented a slower pace of tightening from their previous 0.75% hikes, a few hawkish twists were still announced.
The transcript of their meeting should shed more light on what policymakers have up their sleeve for the next few months, possibly setting the dollar’s and the stock market’s direction in the near term.
The FOMC upgraded their inflation forecasts for 2023 and 2024, hinting that more tightening moves are in the cards. Apart from that, Fed head Powell reiterated that they won’t be complacent about the slight downturn in price pressures.
Officials saw inflation ending 2023 around 3.1%, according to their median projection, compared with 2.8% in the previous quarterly forecast released in September. The latest Fed outlook is at odds with that of Wall Street, which has generally become more sanguine in recent months as price pressures have started to moderate.
In his post-meeting press conference, Chair Jerome Powell linked the central bank’s inflation pessimism to ongoing strength in the labor market, pointing to services prices in particular.
As the Federal Reserve ramps up its most aggressive tightening campaign in decades, the consensus view is that a mild recession will hit both sides of the Atlantic with a high bar for any dovish policy pivot, even if inflation has peaked.
Central bankers have indicated that rates need to remain in the restrictive territory in the months ahead, warning Wall Street shouldn’t expect any rate reductions this year. Yet futures traders continue to bet that the first policy cut will land before 2023 is out.
Powell made clear the Labor Department’s monthly jobs report due out on Friday will also be an important factor in the February decision. Forecasters expect that report to show job growth moderated to 200,000 last month, according to a Bloomberg poll. Unemployment is expected to have remained unchanged at 3.7% and wage growth is seen as having ticked down to 5% on a year-over-year basis.
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