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"Inflation slowdown confirmed" ... 99% chance of FOMC 'baby step' announcement in February

The U.S. central bank, the Federal Reserve, is expected to take a baby step (raise the benchmark interest rate by 0.25 percentage points) at the next regular meeting of the Federal Open Market Committee (FOMC) from February 31 to February 1.

On Jan. 22, the Wall Street Journal (WSJ) reported that "the Fed is considering slowing the pace of rate hikes," and that "Fed officials are discussing the extent of hikes after gaining confidence that inflation (inflation) will ease further this year."

According to the WSJ, the Fed's benchmark rate hike at the next FOMC meeting is likely to be 0.25 percentage points, down from 0.5 percentage points last month. Even FedWatch, where the Chicago Mercantile Exchange (CEM) Group predicts investors' expectations based on Fed Funds futures prices, also showed a more than 99% chance of a 0.25 percentage point hike by the next FOMC.

The Fed took four consecutive giant steps (raising its benchmark interest rate by 0.75 percentage points) last year to curb the soaring inflation rate, the fastest pace since the 1980s. The US benchmark interest rate has risen from "zero" (0) to 4.25~4.50% due to the Fed's seven rate hikes last year.

The Fed's aggressive interest rate hikes eased inflationary pressures, with U.S. consumer price index (CPI) growth falling to around 6 percent from above 9 percent on an annual basis. Signs of slowing inflation have prompted markets to cut rates or adjust the pace of hikes in the face of fears of a recession following higher interest rates.

Recently, there has also been talk among Fed officials about the need to adjust the breadth of interest rate hikes. Fed Director Christopher Waller, known for his hawkish tendencies, said in a speech at the Council on Foreign Relations (CFR) on Jan. 20 that he would prefer to raise the benchmark interest rate by 0.25 percentage points at the next FOMC meeting, saying, "We have recently seen indicators of easing inflation in the corporate sector."

Fed Vice Chairman Layer Brainard also argued at the policy meeting held on Jan. 19 that it is necessary to lower the benchmark rate hike by 0.25 percentage points at the upcoming FOMC meeting, saying, "It is time to slow down the pace of interest rate hikes and see how the market reacts."

The Fed will pay attention to last December's personal consumption expenditures (PCE) price index, which is due to be released this week. According to the WSJ, economists expect the core PCE price index, which excludes food and energy prices, to rise 4.4 percent year-on-year, down from 4.7 percent in the previous month. Brainerd expects a 4.5 percent increase.

However, some predict that the slowdown in the PCE price index in December will not significantly change the Fed's tightening stance. This is because the Fed still blames US inflation on service prices and wage growth, and maintains its stance that it will not stop tightening without slowing related indicators. St. Louis Federal Reserve Bank President James Bullard said, "The margin of rate hikes is still not enough to stop inflation, and we need to raise rates by 0.5 percentage points at this FOMC meeting." [MoneyToday]

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