Financial conditions have been loosening considerablyįourth, some market participants may confuse the speed of the journey with the destination and length of the sojourn. Given that the Fed constantly repeats that monetary policy works through its impact on financial conditions, the scale of the easing is not likely to be consistent with the desired policy stance.įigure 1. Even bitcoin has bounced back from its lows. Stocks surged in the first half of January, before easing somewhat back. Financial conditions tightened considerably between June and mid-October 2022, but since then significant loosening has occurred. Third, financial conditions have been loosening, seemingly contrary to the Fed’s wishes (Figure 1). The jury remains out on how the economy’s course might impact the supply/demand balance. Despite layoffs, especially in the tech sector, labour markets still seem robust and unemployment well below its natural rate. But analysts don’t agree on whether the US will experience recession, let alone when it might start, versus a slowdown or stagflation. Weakening demand is seen in some quarters as further reason to believe the Fed may turn more accommodative than previously thought. The bottom line is that inflation remains above target and there is not yet a convincing message from the data that inflation is credibly heading back to 2%, let alone in a timely manner. Similar interpretive confusion exists for moderating wage data, though forthcoming employment cost index data should offer insights. While gains are significant, the hard work of the last mile still lies ahead. The descent of inflation will not be linear. However, core prices are stickier than headline inflation, and the trajectory for services inflation quite foggy. Participants can pick and choose favourable price data among a sea of indicators – headline, core, super core, trimmed, year-over-year, three-month annualised. It’s clear that inflation has peaked and is coming down nicely, especially headline. They are influenced by data showing that inflation has not only peaked, it is coming down more sharply than earlier thought.īut they are getting ahead of themselves.įirst, the price data are not as clear as many may think. Many market participants are now betting the Fed won’t hike the Fed Funds rate above 5% and will cut rates in the second half, in contrast with the last dot plot. The FOMC is likely to step down the pace of its rate hikes from 50 to 25 basis points. Fed Chair Jerome Powell may need to rein markets in at the Federal Open Market Committee meeting on 25-26 January. But for the time being it’s premature and uncertainty still abounds. With a plethora of improved inflation data and softening real indicators, markets are scaling back expectations about the US Federal Reserve’s rate path and betting the Fed will pivot towards accommodation this year.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |