Fed Looks Set to Dial Down Rate Rises; Inflation May Get Upward Pressure From China's Reopening By James Christie

Good day. Federal Reserve officials have been saying that slowing the pace of interest-rate increases to a more traditional quarter percentage point would give them more time to assess the effects of their increases so far as they determine where to stop their rate-raising campaign. Officials stepped down to a half-point rate rise in December, following four consecutive increases of 0.75 point, and a likely decision to approve a smaller increase in February reflects officials' growing confidence that the U.S. economy is responding to their efforts to curb demand and bring down inflation. China's economic reopening could, however, complicate matters for central bankers. After Beijing kept growth artificially depressed for much of the past three years as it locked down cities and tightened border restrictions to keep Covid-19 from spreading, China will likely consume more energy as its economy recovers. That will put upward pressure on prices of oil and other commodities. European Central Bank President Christine Lagarde said on Friday a consequence of the new direction in Covid policy in China is "there will be more inflationary pressure."

Now on to today's news and analysis.

Top News Fed Sets Course for Milder Interest-Rate Rise in February

Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting and debate how much higher to raise them after gaining more confidence inflation will ease further this year.

They could begin deliberating at the Jan. 31-Feb. 1 gathering how much more softening in labor demand, spending and inflation they would need to see before pausing rate rises this spring.

China's Reopening Complicates Global Fight Against Inflation

Just as signs are starting to point to an easing of inflation worldwide, China's economic reopening after years of strict efforts to control the pandemic is raising questions about whether it could spur costs higher again .

Lagarde Says China's Economic Rebound Revives Inflation Worries

China's abandonment of its zero-Covid policy is good news for global economic growth but it could give a fresh boost to inflation in Europe, European Central Bank President Christine Lagarde said on Friday.

Market Recovery Hinges on Quick Inflation Drop

Behind this year's improved start for markets lies a broad wager that inflation will soon post a once-in-a-generation decline . Market-based gauges of inflation expectations project the annual pace of rising prices will tumble in the months ahead roughly as fast as during the recession that followed the 2008 financial crisis-or when Fed Chairman Paul Volcker used double-digit interest rates to crush the soaring inflation of the late 1970s. Hopes for a quick return to 2% inflation have encouraged bets that the Federal Reserve will pause and even reverse its interest-rate increases this year.

Euro Rises After ECB Member Signals 0.5 Percentage Point Rate Hikes

The euro rose after European Central Bank member Klaas Knot said the ECB is set to raise interest rates by 50 basis points at coming meetings. Mr. Knot told Dutch broadcaster WNL on Sunday that a half-percentage-point rate rise was likely in February and March with further hikes expected in the months thereafter. Attention now turns to a speech from ECB President Christine Lagarde in Germany at 12:45 p.m. ET. (Dow Jones Newswires)

U.S. Economy Unemployed Americans Find Job Searches Take Longer

In December, 826,000 unemployed workers had been out of a job for about 3 1/2 to 6 months, up from 526,000 in April 2022, reflecting how the unemployed are spending more time out of work as employers slow hiring from a red-hot pace.

U.S. Existing-Home Sales Slid Last Year as Interest Rates Surged

U.S. existing-home sales fell again in December, concluding the weakest year for sales activity since 2014. Sales dropped by 17.8% in 2022 from the prior year to 5.03 million, the National Association of Realtors said Friday.

Black Workers, Young People and Low Earners Got Biggest Raises

Black workers, young workers and people on the bottom of the income scale were among those who saw the largest pay increases last year, when employers were readily handing out raises in a tight labor market and high inflation backdrop.

Debt Ceiling Looms Over Capitol as Congress Returns to Work

A deeply divided Congress will return to work this week, pushing ahead with partisan priorities in the Senate and House while also gearing up for a fight over how to address raising the debt ceiling before a potential default later this year.

Yellen Dismisses Minting $1 Trillion Coin to Avoid Default Key Developments Around the World China's Global Mega-Projects Are Falling Apart

Low-quality construction on some Chinese-financed projects around the world risks crippling key infrastructure and saddling nations with even more costs for years to come as they try to remedy problems.

France's Macron Seeks Bigger Military, Leaner Pension System

President Emmanuel Macron's pledge to raise military spending, a day after massive protests of his planned pension overhaul , illustrates the test facing European welfare systems as the costs of war in Ukraine pile up.

Financial Regulation Roundup Federal Reserve Probes Goldman Consumer Business

The Federal Reserve is investigating Goldman Sachs Group Inc.'s consumer business to determine whether the bank had appropriate safeguards in place as it ramped up lending, according to people familiar with the matter.

Crypto Banks Borrow Billions From Home-Loan Banks

Two of the biggest banks to cryptocurrency companies are rushing to stem customer withdrawals by borrowing from Federal Home Loan Banks, the system originally designed to support mortgage lending in the 1930s.

Genesis Demise Marks End of Era for Crypto's Pseudo-Banks Forward Guidance Monday (all times ET)

9:30 a.m.: ECB's Panetta speaks to Committee on Economic and Monetary Affairs of the European Parliament

10 a.m.: EU flash consumer confidence indicator for January; The Conference Board Leading Index for the U.S. for December

12:45 p.m.: ECB's Lagarde speaks at Deutsche Börse Annual Reception in Eschborn

Tuesday

4 a.m.: S&P Global Flash Eurozone Composite PMI

4:45 a.m.: Video message by ECB's Lagarde to 'Croatia, the 20th member of the eurozone' conference

9:45 a.m.: S&P Global Flash U.S. Composite PMI

Research Canada GDP Tracking Ahead of Central Bank's Target

Incorporating the latest Canadian retail sales data into tracking fourth-quarter real gross domestic product growth, Desjardins says it continues to expect an advance of 1.2% quarter on quarter, which would be well above the Bank of Canada's forecast for 0.5% growth. That adds to the upside surprise for third-quarter real GDP growth, as well as upward historical revisions to real GDP relative to when the BOC last offered detailed forecasts in October, Desjardins says. Taken with labor market strength, still elevated inflation and wage growth, and record-high near-term consumer inflation expectations, the sales data does nothing to alter the view of Dejardins that the BOC will lift the policy rate by another one-quarter percentage point next week and then pause.

-Robb Stewart

Commentary The Ultimate Contrarian Indicator to Start the Year

The mood among the world's financial elite as they gathered in the mountain resort of Davos, Switzerland, is typically a useful investment indicator: However they feel, do the opposite, writes James Mackintosh. Not so much this year. The bankers, executives and politicians were more optimistic, but only relative to how pessimistic they were feeling a few months ago. Just like the markets, they have had a bit of a rally, but are still down in the dumps compared with this time a year ago. They are also puzzled by the same uncertainties that trouble investors.

Housing's Big Hurdle Is Affordability

While it is reasonable to expect there will be some improvement in the U.S. housing market in the months ahead, at current interest rates and prices there won't be much to speak of, Justin Lahart writes.

Chinese 'Revenge Spending' Might Not Hit U.S. Levels

China's economy, after a very tough 2022, is poised for a leap and could grow 5% in 2023-compared with 6% in 2019 and 3% last year-and perhaps even more than that, but caution is still warranted , Nathaniel Taplin writes.

Basis Points The U.S. will experience "zero" growth this year and teeter on the verge of recession, economists say, as a result of rising interest rates orchestrated by the Federal Reserve to subdue high inflation. Top economists at the American Bankers Association say the resulting slowdown is likely to trigger a sharp increase in layoffs and push the unemployment rate close to 5% within the next two years. A rapid rise in wages over the past year is also expected to peter out. (MarketWatch) Treasury Secretary Janet Yellen has pledged further U.S. investment in and trade with Africa, where the Biden administration is trying to deepen ties in the face of Chinese and Russian influence. Retail sales in Canada faltered in November, in part as consumers pulled back on grocery purchases with a rise in food prices, though early indications suggest a recovery in overall sales for the holiday season. Sales slipped 0.1% from October to a seasonally adjusted 61.79 billion Canadian dollars, the equivalent of about $45.88 billion, Statistics Canada said. (Dow Jones Newswires) WSJ Pro Research Risk of At-Home Documents

The storage of hard copies of documents at the homes of President Biden and former President Trump points to risks for companies of sensitive papers being at employees' houses. Here ' s a guide on how executives can handle such risks in an era of flexible work arrangements.

This research paper from WSJ Pro Cybersecurity Research, a premium service, is being made available for free to this newsletter's readers.

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01-23-23 0715ET