(Bloomberg) – Federal Reserve policymakers are set to take a first break after an interest rate hike campaign that began 15 months ago, even as they face a resilient U.S. economy and persistent inflation.
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The Federal Open Market Committee is expected to keep its benchmark lending rate in the 5% to 5.25% range on Wednesday, marking the first jump after 10 straight increases dating back to March of last year. While the authorities’ efforts have helped reduce price pressures in the US economy, inflation remains well above their target.
Investors will focus on the Fed’s quarterly dot chart in its summary of economic projections, which is expected to show the benchmark policy rate at 5.1% at the end of 2023.
By contrast, markets are pricing in the possibility of a quarter-point hike in July followed by a similar size cut by December, and some Fed policymakers have pointed out that a pause in the hike cycle should not be considered the last increase.
Fed Chairman Jerome Powell, who will hold a press conference after the meeting, suggested he favored a pause in the hike to assess the impact of both past moves and recent bank failures on credit conditions and the economy. His comment will be scrutinized for clues to the committee’s plans when it meets next month.
What Bloomberg Economics says:
“Discord over the FOMC is mounting. Those who would rather skip a June hike want to wait and see – given the long and variable lags in monetary policy – how 500 basis points of rate hikes to date cool the economy. The more hawkish members are convinced that rates are not yet restrictive enough and that the Fed should not risk falling behind the curve. We see a “hawkish skip” as a way to maintain unanimity within the committee.
—Anna Wong, Stuart Paul, Eliza Winger and Jonathan Church, economists. For a full analysis, click here
Fed officials will have new data on the consumer price index in hand when they begin their monetary policy deliberations on Tuesday. As central bankers target a separate inflation measure for their 2% target, the closely watched CPI report is expected to show underlying price pressures still strong.
The core indicator, which excludes volatile food and energy prices, is expected to rise 0.4% from the previous month. This would mark the sixth month in a row that core inflation has risen by that much or more, and helps explain why interest rates can stay high for longer.
Monthly advances of this magnitude made it difficult for core inflation to cool quickly. On an annual basis, core CPI is expected to rise 5.2%, the slowest pace since November 2021. Headline CPI is expected to decline to 4.1%. Although still uncomfortably high, the gradual moderation in inflation gives the central bank some space to pause.
A report on Wednesday is expected to show further disinflation at the producer level, with a base gauge rising at the slowest annual rate in more than two years as commodity costs continue to stabilize.
May retail sales round out key US economic data this coming week. The value of purchases was likely little changed over the month, which is consistent with sagging consumer demand for commodities.
Further north, Canada’s tight housing supply will be in focus after a revitalized real estate market helped spark a resumption of rate hikes. Thursday’s data will show whether housing starts continued to decline in May, eroding potential housing supply amid record immigration, and whether existing home sales also continued to rise.
Elsewhere in the world, the European Central Bank is expected to continue raising rates, the Bank of Japan may remain on hold, and Chinese monetary authorities may avoid adding stimulus for the time being.
Click here to see what happened last week and below is our summary of what is happening in the global economy.
Europe, Middle East, Africa
In the aftermath of the Fed’s decision, ECB officials are almost certain to deviate from their US counterparts and continue with rate hikes. Economists expect a second straight quarter-point move. With another hike also widely predicted for July, the focus should be on the details of the new quarterly guidance and any hints of the outlook for another move in September.
Additionally, a final version of Eurozone inflation in May will be released on Friday, along with the ECB’s survey of professional forecasts, illustrating the economic community’s collective view of the central bank’s outlook. .
In the Nordic region, Danish inflation will be released on Monday, and later in the week monetary officials may follow the ECB’s rate decision with a hike of their own, as they usually do.
Meanwhile, monthly growth data from Norway and data on inflation and consumer expectations from Sweden will be instructive for central banks in those countries, which are still in tightening mode.
Further east, Ukraine’s central bank will announce its policy rate decision at a time when its war-torn economy appears to be improving faster than expected.
Central banks across Africa will also make decisions in the coming week:
On Tuesday, the Bank of Uganda’s monetary policy committee is likely to hold its key rate for a third consecutive meeting after inflation slowed sharply in May to 6.2%.
The next day, Namibian officials are likely to raise borrowing costs to protect their currency peg to the rand after neighboring South Africa raised rates by 50 basis points.
Central banks in Botswana and Mauritius are both expected to hold rates steady on Thursday as inflation is expected to continue to ease towards their targets.
Thursday is also a big day for tax announcements. Kenya, Tanzania, Uganda, Rwanda and Burundi will unveil budgets that are expected to boost spending to boost recovery from shocks such as droughts, the pandemic and Russia’s war on Ukraine.
Data from Saudi Arabia on Thursday is expected to show inflation stabilizing in May and will likely be close to the 2.7% seen in April. The kingdom’s economy has slowed over the past three quarters, largely due to global weakness causing oil prices to fall.
On the same day, investors will watch whether Israeli inflation picked up in May as the shekel weakened. The currency fell 2.7% against the dollar last month on renewed concerns over Prime Minister Benjamin Netanyahu’s plans to overhaul the judiciary.
Main Chinese economic indicators due out on Thursday are likely to show slowing consumer and business activity in May as post-pandemic momentum fades.
The People’s Bank of China will have the opportunity to add more monetary stimulus, although the majority of economists polled by Bloomberg are not yet predicting a rate change.
Hong Kong and Taiwan will also announce rate decisions on Thursday.
The Bank of Japan is holding its second policy meeting under Governor Kazuo Ueda at the end of the week. Most economists expect no change this time around as speculation swirls that Prime Minister Fumio Kishida is considering a snap election.
On Thursday, trade figures from Japan, India and Indonesia are expected to show the latest state of global demand, while New Zealand also reports first-quarter growth that day.
Brazil’s retail sales data for April is unlikely to maintain the pace seen at the close of the first quarter, giving President Luiz Inacio Lula da Silva yet another reason to harass the central bank in pursuit of lower rates. .
Similarly, Brazil’s GDP proxy data for April is likely to weaken as Latin America’s largest economy pulls lower from much stronger-than-expected first-quarter output readings.
The central banks of Brazil, Colombia and Chile release surveys of economist expectations, with the Banco Central de Chile also releasing a separate survey of traders.
Colombia posted April manufacturing, industrial production and retail sales results, which turned negative in March as the highest borrowing costs since 1999 weighed on consumers and businesses and undermined the trust.
Peru’s monthly GDP reading for April is expected to build on the March rebound as mining operations normalize after labor disputes and civil unrest in the south of the country.
Argentina’s inflation report for May is expected to show a 16th straight rise in consumer prices, pushing the annual rate to over 116% from the current 108.8%.
Weak international reserves, an overvalued peso and presidential elections in October suggest that the government is short on tools and is unlikely to want to do much about inflation before the end of the year.
–With help from Robert Jameson, Monique Vanek, Michael Winfrey and Laura Dhillon Kane.
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