Stable inflation expectations can ease faster price hikes – Fed data Reuters

By Howard Schneider and Jonnelle Mars

(Reuters) – The Federal Reserve’s earnings figures showed that inflation expectations remained anchored at the end of last year, while an alternative measure to inflation began to ease the sharpest price pressures.

At the same time, a survey of Reuters economists confirmed expectations for a weak January employment report in the US, with data released on Friday expected to add 153,000 jobs, which would be the worst result in a year. About 10% of those surveyed believe that the economy has lost its job in a month, which was a record number of new COVID-19 infections due to the highly transmissible Omicron variant.

The good and bad news may well reflect the nature of the economic data collected in the coming weeks, ready to begin to reverse the extraordinary adjustment that political leaders made two years ago to protect the economy from the economic consequences of the pandemic. .

The U.S. central bank has said interest rates will begin to rise at a March 15-16 policy meeting to keep inflation under control as inflation continues to tighten. The rate of rise in prices has accelerated to multi-decade highs and at 5.8%, the Fed’s preferred measure, the central bank’s 2% target is almost three times higher.

But in the meantime, the data could affect how quickly policy makers expect to accept rate hikes, and how firm they are in determining their path in their policy statement.

The start of the year may leave room for debate, as some economists predict little or no economic growth for the first few months of the year as a result of a push by Omicron, which has cut job growth.

In an interview with Reuters Breakingviews, San Francisco Fed Chair Mary Daly said rates should rise, but the Fed should look at a wide range of risks, including federal spending support this year, among other things. and this overreaction could damage the recovery as inflation is acting on its own.

“Do we have to adjust the policy rate? Absolutely,” Daly said. But “you don’t have to react too much and raise rates too fast … We’re not trying to deal with a sticky spiral of wage prices. We’re accepting that the economy is reaching a self-sustaining level,” and he doesn’t need to. Fed support for low market interest rates.

‘OPPORTUNITIES’ ON THE TABLE

Inflation data to be released next week will show that consumer prices have continued to rise at a rate of more than 7% year-on-year until January; A level reminiscent of the high inflation period of the early 1970s and early 1980s and enough to offset recent wage gains. for many employees.

But the monthly rate of change is expected to slow, and some recent inflation data have also pointed in that direction.

Along with actual price data, Fed officials are paying close attention to measures of inflation expectations, or whether households and businesses are predicting how inflation will play out in the future.

On Friday, the Fed updated an index that combines several measures of housing and market expectations. It has risen this year, but largely unchanged from the previous quarter, although inflation itself has advanced – a sign that the public has not lost confidence in the Fed’s ability to defend its 2% target, albeit at a faster-than-expected price. growing.

(Chart: Fed Inflation Expectations Index, https://graphics.reuters.com/USA-FED/EXPECTATIONS/zjvqkqgxmvx/chart.png)

A Dallas Fed inflation measure that excludes items with the fastest and slowest price rises rose slightly in December, from 2.9% to 3% annually, a sign that inflation has affected the economy.

But the month-on-month rate fell sharply, and the share of the fastest-growing commodity prices also fell.

(Chart: Prices are rising faster, https://graphics.reuters.com/USA-FED/ECONOMY/znvnejzxjpl/chart.png)

However, the Fed has positioned itself to raise rates, and if inflation trends do not slow down, central bank officials have stressed that they will do whatever it takes, raising rates at every meeting or more than the usual quarter-percentage point. increases.

For now, “every opportunity is on the table at every meeting,” Atlanta Fed Chairman Raphael Bostic told the Financial Times over the weekend. “If the data says that things have evolved to a 50-point point move as it should or would be (appropriate), then I’ll bend over backwards … If it makes sense to move on to subsequent meetings, I’ll be comfortable with that.”