Federal Reserve’s Rate Hike Reduces Chances of March Rate Cut Amid Economic Growth Momentum

Summary

  • Economic growth continues in 2022 on the momentum from Q4 2021 employment gains.
  • Interest rate cuts are less likely in March due to strong economic indicators.
  • Jerome Powell, chair of the Federal Reserve, stated that interest rates have peaked.
  • New orders for services businesses have increased, stimulating export growth and causing a surge in spending.
  • Inflation remains high but is moderating, with a 2% target hit in Q4.
  • Supplier deliveries appear to be slowing, potentially signaling supply chain disruptions.
  • Services sector employment rebounds after December’s dip.

Economic Growth and Interest Rates

Evidence from January’s employment gains indicates a continued economic growth spillover from the strong momentum of the previous quarter. This trend has reduced the likelihood of a March interest rate cut. The U.S. central bank has increased its policy rate by 525 basis points since March 2022, bringing the current rate to a range of 5.25% to 5.50%.

Resumption of Consumer Spending

Consumer spending saw a surge after lockdown restrictions eased, with spending on services trailing outlays on goods. The pace, however, has been sufficiently robust to maintain elevated inflation levels.

Services Business and Inflation

A rise in new orders received by services businesses caused a jump in export orders. Though high, the overall inflation rate is cooling down with the personal consumption expenditures price index excluding food and energy pegged at a 2% annualized rate in Q4, hitting the Fed’s target.

Supply Chain Constraints

The Institute for Supply Management (ISM)’s measure of supplier deliveries and the increase in orders indicate a resurgence of supply chain constraints. These could be exacerbated by delays due to winter storms and cargo vessel attacks in the Red Sea.

Labor Market Health

The ISM survey showed a bounce back in the services sector’s employment, which initially plunged in December but recovered. However, this is not a reliable gauge of the labor market’s health, given that nonfarm payrolls posted their largest increase in a year in January.

These factors could significantly impact forex trading. With interest rates likely to remain unchanged, assets tied to the dollar could prove to be of interest to traders.

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