Fed to shed light on depth of global growth concerns
MADRID: For more clues as to how slumping oil prices and a faltering Chinese outlook could sway policymakers in the coming months, look no further than January’s meeting of US Federal Reserve rate setters.
Concerns over weaker global growth are casting doubt on the pace at which the US central bank will continue hiking interest rates, after December’s first rise in nearly a decade.
Expectations for a March rate increase are already starting to fade, and economists polled by Reuters now forecast three hikes in 2016 rather than the four initially floated by the Fed.
Against a backdrop of volatile trading in global stocks, Fed officials have shrugged off in recent weeks the impact of financial market swings on their decisions. The Fed is widely expected to leave its federal funds rate unchanged at 0.25-0.50 percent when policymakers conclude their meeting on Jan. 27. But falling inflation assumptions, coupled with the market turbulence, could lead them to signal deepening concern over the US and world economic outlooks.
“If the statement acknowledges increased risks without mention of expected resilience in the medium-term outlook, this would be a dovish sign,” analysts at BNP Paribas said in a note.
US data paints a more subdued domestic picture, too, as a strong dollar buffets the economy. Consumer prices unexpectedly fell in December.
Recent weak reports on retail sales, housing starts and industrial production suggest a slowdown in activity at the end of last year, as did a six-month high in US jobless claims reached in mid-January.
Preliminary fourth quarter data on US output due on Jan. 29 should confirm the easing momentum, with the annual pace of expansion seen coming in at 0.7 percent, according to the latest model from the Atlanta Federal Reserve.
The most recent Reuters poll put US growth at 1.3 percent, following a 2 percent rise in the third quarter.
Some believe a weaker fourth quarter is unlikely to cloud longer-term prospects, however, with underlying trends in the labor market still robust.
“A fourth quarter slowdown is not likely to derail the economy from growing at close to the 2.2 percent trend rate in 2016,” HSBC analysts said.
The Fed will lay its cards on the table days after the European Central Bank signaled that further easing of its monetary policy was likely in March. Tumbling oil prices have sunk the outlook for inflation, pushing the ECB to flag its willingness to act again after a deposit rate cut and an extension of its government bond-buying program in December. A preliminary reading of consumer prices in the euro zone due on Jan. 29 should give more clues.