— This is the script of CNBC's financial news report for China's CCTV on January 30, 2023.
The Federal Reserve, the European Central Bank, and the Bank of England have rate-hike meetings over the coming days. Here are the market expectations.
At the time of this press release, Fed fund futures are now pricing in a 99.9% chance of a 25-basis-point hike at the next Fed meeting. The CME FedWatch tool also shows that traders even see a 0.1% chance the FOMC will maintain its current interest rate.
There were several factors that led to this expectation. Personal consumption expenditures index reported by the Commerce Department last Friday is one of the considerations. This is the Fed's preferred inflation measure.
Data shows that so-called core PCE, which excludes food and energy, increased 4.4% from a year ago, down from the 5.2% reading in September. It's still well above the ECB's 2% target, but the pace of price increases is slowing.
Ron Insana
co-CEO at Contrast Capital Partners
"Certainly at an annualized rate, we're seeing a big pronounced slowdown in inflation outlook."
Friday's report shows the continued shifting of inflation pressures from goods to services. We need to pay attention to the core services prices, which exclude prices for food, energy, shelter and goods. Fed Chair Jerome Powell has said prices in this category offer the best gauge of higher wage costs passing through to consumer prices. The data shows that this category rose 4% in December from a year earlier.
Therefore, we are seeing such a situation where inflation is slowing because prices of goods are falling as supply chain disruptions fade and aggresive hikes put brakes on demand. However, the Fed is wary that consumer prices might reaccelerate because of the overheated labor market.
This graphic shows the current unemployment rate is at 3.5%. It has fallen below Fed official's median estimate of the natural rate of unemployment. It signals that wage growth is much stronger than Fed officials feel is consistent with stable prices. And it could lead to a wage-price spiral.
Jeremy Siegel
Wharton School of business professor
"The only thing is the labor market that that's still tight. That's the only thing and as we pointed out, that's the worker trying to catch up to all the purchasing power that he and she lost over the last two and a half years."
Some market watchers pointed out that the potential slowing rate increases could give officials more time to study the effects of earlier rate rises. The markets focus on how long the Fed is planning to hold rates at that higher level.
After the Federal Reserve, the ECB will also announce its policy decision this week. Markets have priced in a 50 basis points hike for the next two policy meetings.
But in terms of the ECB's moves after March, uncertainty is high. The ECB will indeed face a crucial dilemma.
On the one hand, inflation is still high.
Klaas Knot
President of De Nederlandsche Bank and European Central Bank board member
"The current situation is not satisfactory in that respect. And what we've seen thus far is data that has not been encouraging from our end, we've seen one more inflation reading, where there was no signs of abating of underlying inflationary pressures. So we have to do what we will have to do. And core inflation has not yet turned the corner in the euro area."
European Central Bank President Christine Lagarde has repeatedly used the phrase "staying the course" when referring to upcoming rate decisions.
On the other hand, some market watchers doubt the bank will keep its hawkish stance for much longer.
According to a senior European economist from HSBC, the impact of the ECB's current tightening cycle on economic growth will likely outweigh the impact of inflation. Analysts also pointed out that if the U.S. entered a more severe recession than anticipated and/or the Fed were to cut rates aggressively in response to any slowdown, the ECB's rate hikes could stop sooner.
