The Day at a Glance | February 1 2022

The Top

*Members of the FED consider that markets are taking into account too much of an aggressive increase in interest rates.

*France logged higher than expected inflation in January (3.3% annual vs 2.9%e.).

*South Korea recorded its widest trade deficit in three decades in light of growing imported energy costs.

*COVID-19 cases at a global level slowed down for the first week.

Economic environment

FED smoothens monetary normalization expectations. Members of the Federal Reserve have pointed out that they will avoid causing disruptions in the U.S. economy through interest rates at all costs. In different public events, four members of the Federal Reserve have started to show that they will be cautious and that the cycle of increasing interest rates will be gradual; in contrast with what some people in the market believe will happen. Esther George, of the Kansas City FED – and one of the most hawkish members of the central bank – said that there is no need for unexpected rises to occur, and that it`s important for increases to occur gradually. Mary Daly, of the San Francisco FED, denied that the central bank will have to carry out aggressive actions in order to contain inflationary risks and even argued about risks that could slow down the economy and moderate inflation as a minor effect of fiscal stimulus. Similar to George, Daly highlighted the need for the FED to carry out gradual movements based on data that is available at every meeting that the central bank has; this would mean that 3 or 4 interest rate increases will happen in 2022. Raphael Bostic, of the Atlanta FED, considered that 3 increases in 2022 would be enough and completely discarded the possibility of a 50 bp increase in March. Thomas Barkin, of the Richmond FED, considered that it`s important to normalize the central bank`s monetary stance, but that the pace at which it does so will depend on how fast inflation accelerates. Markets are currently taking into account 5 increases in 2022 after Jerome Powell assured last week that they must be agile regarding the bank`s adjustment and that the economy`s support must be withdrawn decisively. Among analysts, the outlook is completely uncertain as there are some that only expect 3 25bp increases, and some that even suggest that there will be 7 increases. Uncertainty has shot up in light of unclear directions concerning the future of the FED`s latest monetary policy statement. This will be resolved in March`s meeting as members will reveal interest rate forecasts