What is the level of dissent within the Federal Reserve?

What is the level of dissent within the Federal Reserve?

Investors will watch the release on Wednesday of the Federal Reserve’s minutes from its February meeting for insight into how much dissent there was over the latest decision to slow the pace of interest rate increases.

At its meeting ending February 1, the US central bank chose to slow the pace of its interest rate increases again, lifting its key policy rate by 0.25 percentage points after a series of 0.75 and 0.5 percentage points rises last year. At the time, the decisions made sense because inflation, and the US economy more broadly, had been cooling.

But since the February meeting, the US has reported that employers hired 500,000 people in January, nearly three times the forecast; that consumer prices slowed less than expected; and that retails sales showed the US consumer remained resilient.

All that suggests the Fed’s rate-rising job is not yet done and might even require more aggressive action than its members had forecast.

Dissent within the Fed should therefore indicate members’ willingness to once again take up the mantle of aggressive policymaking. Two Fed officials — Cleveland Fed president Loretta Mester and St Louis Fed president James Bullard — last week said they would have supported a larger 0.5 percentage point increase at the February meeting.

Evidence of more widespread dissent could persuade the market that the Fed might be open to raising rates higher and for longer than was indicated in the central bank’s last survey of officials — the so-called “dot plot” from December. Kate Duguid

Will China cut rates?

China’s government has made a point of prioritising growth this year, and on Monday markets will be focused on the next potential flashpoint: the so-called loan prime rates, which serve as the country’s benchmark interest rates.

Economists are expecting the People’s Bank of China to keep the one-year LPR, the main short-term lending rate, and the five-year LPR, which underpins mortgage lending, unchanged at 3.65 per cent and 4.3 per cent respectively.

That is mainly because the PBoC this month did not tweak the medium-term lending facility rates, which serve as floors for the two benchmarks.

The banks can, and have, changed these rates before without any earlier action by the PBoC. But economists think that is unlikely this time around, since local governments are already rolling out measures to support the country’s beleaguered property sector. In January, banks across almost 20 major cities cut their minimum mortgage rates for first-time buyers on government orders, easing pressure on the central bank to cut rates.

Iris Pang, chief China economist at ING, said such government directives “would result in banks not having enough room to squeeze net interest margins”, making any surprise moves on the LPRs even less likely. Hudson Lockett

Will European business sentiment improve?

The fall in wholesale gas prices and the easing of inflation are expected to result in improving business sentiment across Europe this month.

The flash S&P purchasing managers’ index, a measure of activity compared with the previous month, is expected to show that business growth accelerated in the eurozone in February after registering expansion for the first time in seven months in January.

Economists polled by Reuters forecast that the eurozone composite PMI, released on Tuesday, will rise to 50.5 in February from 50.3 the previous month, boosted by stronger activity in the services sector.

Ellie Henderson, economist at Investec, said that “the optimism seen at the start of this year extended through into this month”.

In contrast with expectations of a deep downturn forecast only a few months ago, many economists now think that the eurozone economy will dodge a recession this winter, helped by lower gas prices and cooling inflation.

Preliminary data calculated without figures for Germany showed that eurozone inflation fell more than expected to 8.5 per cent in January from 9.2 per cent in December. Analysts calculated that final figures, to be released on Thursday, would be revised up to 8.7 per cent, but that would still be the lowest in seven months.

The PMI figures for the UK are also expected to show an improvement, with the Composite index forecast to rise to 49 this month from 48.5 in the previous month. This would still be below the 50 mark which indicates a majority of businesses reporting a contraction in activity, driven by continued weakness in manufacturing.

“Although the operating environment will no doubt be challenging over the course of 2023, continued faith in an economic recovery in 2024 should continue to support UK business sentiment,” said Henderson. Valentina Romei