Fed’s Powell: Inflation falls, more rate hikes likely on the way

February 08, 2023 10:46

US stock markets rallied on Tuesday after the US Federal Reserve (Fed) head Jerome Powell delivered a speech before the Economic Club of Washington. In other news, the US-China trade balance hit a record high in 2022 even as their diplomatic relations deteriorated. In the UK, the FTSE 100 share index is heading back towards last Friday’s record high, as hopes build that the country’s economy could avoid a recession.

Fed’s Powell: Disinflation, rate rises likely to continue

In his remarks, Jerome Powell said that inflation has started to drop but stressed that it is going to be a long process. Powell noted that “the disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy. But it has a long way to go. These are the very early stages.”

Commenting on interest rates, the Fed’s head said that if inflation runs hotter than the central bank expects, further rate hikes should be discussed. “The reality is we’re going to react to the data. So, if we continue to get, for example, strong labour market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in,” Powell noted.

The US Dollar Index (DXY) lost ground (-0.29%) as a result of Powell’s comments.

Chinese inflation likely to have accelerated in January

The National Bureau of Statistics (NBS) will release its January 2023 inflation report. Economists forecast that CPI inflation accelerated to 2.1% in January on an annualised basis. Chinese authorities aim to bring inflation closer to the 3% target. Inflation rose by 2% year-on-year in 2022, according to statistics reports presented by the NBS.

The Chinese government radically changed its stance against Covid-19 by withdrawing most restrictive measures. The International Monetary Fund’s (IMF) head, Kristina Georgieva, noted that China’s comeback could be the most important factor related to global economic growth in 2023. In January, Georgieva had expressed her concern saying, “what if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?”.

Bloomberg's analysts forecast China’s GDP to increase by 5.8% in 2023. In 2022, the Chinese economy grew by 3.0%.

UK GDP Q4 2022 report: Recession or not?

On Thursday February 9th, a preliminary report regarding the UK’s GDP in the fourth quarter of 2022 will give investors and traders the opportunity to scrutinise the country’s economic condition. The Office for National Statistics (ONS) report is expected to show GDP growth of about 0.4% on a yearly basis.

However, it should be noted that the UK economy contracted by 0.3% in the July-September quarter. Economists note that one more contraction in Q4 2022 would mean that the country’s economy had entered into a recession period. 

The Bank of England (BoE) has signalled that it’s considering pausing its monetary tightening cycle with some policymakers expressing their concerns regarding the timing and how such a decision could hurt the economy. The BoE’s Governor Andrew Bailey suggested that inflation will fall more rapidly during the second half of 2023. Conflicting messages have weakened the British pound which hit a one-month low against the US dollar earlier this week.

NIESR: UK likely to avoid recession 

A report by the National Institute of Economic and Social Research (NIESR) suggested that the UK will likely avoid recession. Economists at the British economic think tank, however, said that high prices would hit one out of seven households. NIESR predicts the economy will grow by just 0.2% in 2023, and 1% in 2024.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.