What clues will the Federal Reserve give about interest rate cuts this year?

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The timing and speed of Federal Reserve interest rate cuts have been the biggest single driver of markets this year.

Fed policymakers have indicated they do not expect to vote to alter interest rates at next week’s meeting, which runs from Tuesday to Wednesday. Traders in the futures market are putting the odds of a cut at just 3 per cent.

But economists and analysts will be watching closely for any hints about how the Fed will proceed in the year ahead. The Fed’s own projections are for the central bank to cut interest rates three times this year, while traders are expecting as many as five or six cuts, with a roughly 50 per cent chance that the first one comes as soon as March.

“The commentary ahead of the blackout period had suggested the Fed saw no imminent need for a rate cut, so we expect it to continue to push back against an early move,” said James Knightley, economist at ING. “Despite this, we believe the Fed will end up delivering substantial interest rate cuts. We continue to see some downside risks for growth in the coming quarters relative to the consensus.”

The chances of a March cut fell this month after consumer price inflation data came in higher than expected. The strength of the US consumer has also been evident in retail sales data and in gross domestic product figures, which showed the US economy expanded at an annualised rate of 3.3 per cent in the fourth quarter, far above consensus estimates.

The Fed may also signal whether it plans to make changes to its balance sheet. At the moment, the central bank is engaged in “quantitative tightening”, or shrinking its holdings of government bonds. Minutes from the Fed’s December meeting indicated that some officials were ready to begin discussing an end to that policy. Kate Duguid

How close is the Bank of England to its first rate cut?

Investors will also scrutinise the Bank of England’s latest monetary policy announcement on Thursday to assess when UK rate cuts will arrive.

Economists and markets widely expect the BoE to hold interest rates at a 15-year high of 5.25 per cent for the fourth consecutive time on Thursday, but markets will be alert for any change of tone in the communication.

The central bank is likely to lower its inflation forecasts following the much larger than expected fall in the headline measure in October and November which has left price growth below the BoE’s previous forecasts from November, despite a slight uptick in December’s data.

Lower gas prices will also prompt the bank to forecast that inflation will return to target earlier, probably in the spring of 2024 instead of late 2025, according to analysts.

As a result, the BoE might drop the reference to “further tightening in monetary policy” being required in case of evidence of more persistent inflationary pressures, according to Elizabeth Martins, economist at HSBC. Instead, the central bank might use more neutral language implying rates could move in either direction to return inflation to its target, she said.

“The Bank of England will probably throw in the towel on the pretence that interest rates could rise further,” said Paul Dales, chief UK economist at Capital Economics.

However, policymakers are expected to push back on the market pricing of interest rate expectations amid concerns over the multiple risks to inflation, spanning the still elevated wage growth and the price pressures coming from the Red Sea crisis.

“Most members of the committee will probably want more reassurance on wage and price pressures before supporting a cut in bank rate,” said Andrew Goodwin, chief UK Economist at Oxford Economics. Valentina Romei

Is inflation still falling in the eurozone?

A lot is riding on January’s eurozone inflation data, which will provide a crucial sign of how fast the European Central Bank is likely to cut interest rates when it is released on Thursday.

ECB president Christine Lagarde said this week that inflation was “expected to ease further over the course of this year”, but added that rate-setters “need to be further along in the disinflation process” before they could be confident enough to cut rates.

Economists polled by Reuters forecast annual price growth would be unchanged from December at 2.9 per cent, while excluding energy and food the core rate would drop from 3.4 per cent to 3.2 per cent. However, there is more uncertainty than usual because prices are being pulled both up and down by many competing forces.

Wholesale gas and electricity prices are lower, but that may be offset by the phasing out of government subsidies, which pushes prices up. Yet an expected reduction to the weight of energy in the annual change to the basket used to measure inflation could lower the figure.

Goods inflation is expected to slow, but rapid wage growth could keep prices rising rapidly in the labour-intensive services sector. The increased cost of shipping due to attacks on vessels in the Red Sea may also add to goods prices.

“The difficulty you have is trying to understand the underlying price pressures when you still have all these distortions,” said Greg Fuzesi, an economist at JPMorgan. But he forecast eurozone inflation would still be on track to hit the ECB’s 2 per cent target in the third quarter and underlying inflation would also slow, opening the door to a rate cut in June. Martin Arnold