OPINION
Market Rating Before FOMC MeetingJan 31
US Nonfarm Payrolls will be published soon
Inflation pressures faced by the global economy at the exit from the pandemic have been gained momentum due to the effects of the Russia–Ukraine war, while central banks have entered a tightening cycle with relatively different monetary policy stories.
In particular, in the United States, where the headline CPI reached a 40–year peak, the Fed is preparing to decide on the path of interest rate increases that it started in March with a balance of wage and price increases in the shadow of converging full employment.
The labor force statistics will be published by the Bureau of Labor Statistics (BoLS) of the US Department of Labor are of great importance under this outlook. Nonfarm payrolls, which is considered the most important indicator of the labor market, is expected to grow by 500k. The critical data for the wage – price spiral is the average hourly earnings, which are expected to increase by 5.5 percent.
In the National Employment Report prepared in cooperation with ADP Research Institute and Moody's Analytics, which is followed as a preliminary data in the markets, private sector employment increased by 455 thousand in March. Similarly, jobless claims were at a 3-month low of 187 thousand in the week ended on March 19.
The price list of core personal –consumption expenses, known as the inflation indicator that the Fed follow, in other words, the core PCE, increased by 0.4 percent in February and it set a record with 5.4 percent year-over-year. The PCE, which signals that price pressures above the targeted average of 2 percent will continue, is the most important element that constitutes the rate hike pressures for the Fed.
As a matter of fact, the Bank increased its federal funds target by 0.25 basis points for the first time since November 2018. Reporting that the Russian invasion of Ukraine led to humanitarian and economic difficulties, the Federal Reserve noted that the impact on the US economy will be extremely uncertain and is likely to create additional upward pressure on inflation and put weigh on additional activity in the near term.
In the Economic Projections Report published by the Fed, the Committee members' expectation for PCE increased from 2.6 percent to 4.3 percent for 2022. Also, the rate hike projections were updated from 0.9 percent to 1.9 percent for 2022, while the unemployment rate projections were kept steady at 3.5 percent.
Fed Chair Jerome Powell said that the labor market is extremely tight and they are cautious against upside risks to inflation and inflation expectations.
To sum up, while labor market conditions in the world's largest economy are approaching full employment, the Fed, which is in a leading position in global monetary policy, is ready to adjust its monetary policy instruments to ensure that inflation does not solidify. Having completed its current asset purchase program, the Fed continues to monitor the inflation pressure of high commodity prices due to the Russia –Ukraine war. In addition, rising wages, as the increase in labor demand relatively exceeds the labor supply, are an additional obstacle to achieving the inflation path targeted.
Although the members of the Committee predicts that PCE will fall to 4.3 percent at the end of the year after rising a little more, and that there will be a 25 basis point rate hike at each remaining meeting for 2022, it is necessary to underline that these are March projections. In other words, inflation pressures will decide whether to make more than 6 interest rate hikes projected in the March meeting.
Thus, labor statistics will also be critical in this sense. In particular, the fact that the average hourly earnings in the report exceeded market forecasts of 5.5 percent on an annual basis, creating a forecast for the future of additional wage contribution to inflation, could reduce the Fed's expectations for a 50-bps rate hike for the meeting in May. As a result, dollar can put pressure on developed country currencies and relatively risky instruments.
In particular, in the United States, where the headline CPI reached a 40–year peak, the Fed is preparing to decide on the path of interest rate increases that it started in March with a balance of wage and price increases in the shadow of converging full employment.
The labor force statistics will be published by the Bureau of Labor Statistics (BoLS) of the US Department of Labor are of great importance under this outlook. Nonfarm payrolls, which is considered the most important indicator of the labor market, is expected to grow by 500k. The critical data for the wage – price spiral is the average hourly earnings, which are expected to increase by 5.5 percent.
In the National Employment Report prepared in cooperation with ADP Research Institute and Moody's Analytics, which is followed as a preliminary data in the markets, private sector employment increased by 455 thousand in March. Similarly, jobless claims were at a 3-month low of 187 thousand in the week ended on March 19.
The price list of core personal –consumption expenses, known as the inflation indicator that the Fed follow, in other words, the core PCE, increased by 0.4 percent in February and it set a record with 5.4 percent year-over-year. The PCE, which signals that price pressures above the targeted average of 2 percent will continue, is the most important element that constitutes the rate hike pressures for the Fed.
As a matter of fact, the Bank increased its federal funds target by 0.25 basis points for the first time since November 2018. Reporting that the Russian invasion of Ukraine led to humanitarian and economic difficulties, the Federal Reserve noted that the impact on the US economy will be extremely uncertain and is likely to create additional upward pressure on inflation and put weigh on additional activity in the near term.
In the Economic Projections Report published by the Fed, the Committee members' expectation for PCE increased from 2.6 percent to 4.3 percent for 2022. Also, the rate hike projections were updated from 0.9 percent to 1.9 percent for 2022, while the unemployment rate projections were kept steady at 3.5 percent.
Fed Chair Jerome Powell said that the labor market is extremely tight and they are cautious against upside risks to inflation and inflation expectations.
To sum up, while labor market conditions in the world's largest economy are approaching full employment, the Fed, which is in a leading position in global monetary policy, is ready to adjust its monetary policy instruments to ensure that inflation does not solidify. Having completed its current asset purchase program, the Fed continues to monitor the inflation pressure of high commodity prices due to the Russia –Ukraine war. In addition, rising wages, as the increase in labor demand relatively exceeds the labor supply, are an additional obstacle to achieving the inflation path targeted.
Although the members of the Committee predicts that PCE will fall to 4.3 percent at the end of the year after rising a little more, and that there will be a 25 basis point rate hike at each remaining meeting for 2022, it is necessary to underline that these are March projections. In other words, inflation pressures will decide whether to make more than 6 interest rate hikes projected in the March meeting.
Thus, labor statistics will also be critical in this sense. In particular, the fact that the average hourly earnings in the report exceeded market forecasts of 5.5 percent on an annual basis, creating a forecast for the future of additional wage contribution to inflation, could reduce the Fed's expectations for a 50-bps rate hike for the meeting in May. As a result, dollar can put pressure on developed country currencies and relatively risky instruments.
