Federal Reserve to decelerate policy tightening pace further

Economic indicators that provide nuggets about the state of United States inflation have conveyed an expression of deceleration in the Consumer Price Index (CPI). A contraction in consumer spending and lower prices fixed by producers at their factory gates in the month of December are indicating that the inflationary pressures are no more extremely stubborn now and are in a declining trend.

Therefore, the think tanks have started considering a further slowdown in the pace of policy tightening by the Federal Reserve (Fed).

Analysts at Rabobank point out that it has become increasingly likely that the Federal Reserve will slow down its hiking cycle to 25 bps. For interest-rate guidance “We continue to think that based on the fading momentum of inflation, the Federal Open Market Committee (FOMC) is likely to stop at a 4.75-5.00% target range and pause for the remainder of the year.”

It is worth mentioning that after hiking interest rates by 75 basis points (bps), straight for four times, Fed chair Jerome Powell trimmed the scale of the interest rate hike to 50 bps in its December monetary policy meeting. And now, is considering a further decline in the scale of the interest rate hike to 25 bps.

United States Employment data hogs limelight

Wednesday’s trading session is going to be a power-pack one amid the release of the United States Automatic Data Processing (ADP) Employment data and ISM Manufacturing PMI apart from the Federal Reserve policy. According to the estimates, the economic data is seen at 170K, lower than the former release of 235K.

The US labor market remained extremely tight in CY2022 but the continuation of interest rate hikes by Federal Reserve chair Jerome Powell is denting the expression of optimism in producers. Firms are aiming to optimally use their current labor force to handle operations and have paused the recruitment process due to the dismal economic outlook.

Meanwhile, an absence of expansion plans from various firms to avoid higher interest obligations has resulted in lower demand for fresh talent.

The US ISM Manufacturing PMI data is expected to contract to 48.0 from the former release of 48.4. As firms are operating with less capacity to avoid higher inventory due to lower demand, a contraction in manufacturing activities won’t be a surprise for the market participants. However, this might accelerate United States' recession fears.

Bank of England is keen to contain its double-digit inflation figure

Despite being the early adopter of hawkish monetary policy, the Bank of England has failed in achieving a decent decline in the inflation rate. The United Kingdom economy is operating with a double-digit inflation rate despite pushing interest rates to 3.50%. Rising food prices and labor costs have been a major hurdle for Bank of England Governor Andrew Bailey in achieving price stability. According to a poll from Reuters, Investors are mostly betting on another half percentage-point increase to 4.0% and that Bank Rate will peak at 4.5% soon.

A fresh rate hike cycle by the central banks is going to trim the Federal Reserve-Bank of England policy divergence.