Financial and Monetary Systems

Fed agrees to slow interest rates and other economy stories you need to read this week

Top stories: Fed agrees to slow interest rates; COVID hits China’s services sector; Euro zone business activity contracted less than initially thought.

Top stories: Fed agrees to slow interest rates; COVID hits China’s services sector; Euro zone business activity contracted less than initially thought. Image: Unsplash/Giorgio Trovato

Stephen Hall
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  • This weekly round-up brings you the key economic stories from the past seven days.
  • Top stories: Fed agrees to slow interest rates; COVID hits China’s services sector; Euro zone business activity contracted less than initially thought.

1. The US central bank should slow interest rate rises, Fed says

All officials at the Federal Reserve's December 13-14 policy meeting agreed the US central bank should slow the pace of its aggressive interest rate increases, allowing them to continue increasing the cost of credit to control inflation but in a gradual way meant to limit the risks to economic growth.

The meeting minutes, which were released on 4 January, showed policymakers still focused on controlling the pace of price increases that threatened to run hotter than anticipated and worried about any "misperception" in financial markets that their commitment to fighting inflation was flagging.

But officials also acknowledged they had made "significant progress" over the past year in raising interest rates enough to bring inflation down. As a result, the central bank now needed to balance its fight against rising prices with the risks of slowing the economy too much and "potentially placing the largest burdens on the most vulnerable groups" through higher-than-necessary unemployment.

"Most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance," the minutes said, indicating officials may be prepared to scale back to quarter-percentage-point increases as of the 31 January-February 1 meeting, but also remained open to an even higher than anticipated "terminal" rate if high inflation persists.

A bar chart showing US inflation rate from 1990-2022. Officials acknowledged that they had made
A bar chart showing US inflation rate from 1990-2022. Officials acknowledged that they had made Image: Statista.

2. COVID hits China’s services sector

China's services activity shrank in December as surging COVID-19 infections hit demand, a private-sector survey showed on 5 January, although the pace of recent declines slowed while business confidence rose to a 17-month high.

The Caixin/S&P Global services purchasing managers' index (PMI) rose to 48.0 in December from 46.7 in November but remained below the 50-point mark, which indicates contraction in activity, for a fourth straight month.

China abruptly removed its stringent zero-COVID strategy in early December after rare public protests over the protracted curbs, triggering a surge in COVID-19 infections across the country.

The hit to business caused by the new spread of the virus extends the pain to the services sector caused by the country's COVID curbs and reflects a similar trend seen in a larger official services PMI, published in December.

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News in brief: Economy stories from around the world

Eurozone business activity contracted less than initially thought at the end of last year as price pressures eased, according to a survey which suggested the bloc's recession may not be as deep as expected.

Germany has recorded its highest annual inflation in more than 70 years, according to preliminary data released in January by the country’s Federal Statistical Office, reports Ap News. Surging energy and food prices due to Russia’s attack on Ukraine saw full-year inflation reach 7.9% in 2022.

Fresh food prices at British supermarkets in early December were 15% higher than a year earlier, the biggest annual increase since at least 2005 when records started, figures from the British Retail Consortium showed on 4 January. The Bank of England has forecast that inflation will remain high over the coming months due to the ongoing impact of high energy bills before falling later in 2023.

It comes as the British Chambers of Commerce said British businesses are gloomy about prospects for 2023 as they face the likelihood of a surge in energy bills and ongoing post-Brexit trade difficulties.

Taiwan's exports in December likely dropped from a year earlier for the fourth month in a row amid fears of a global recession, uncertainties due to the war in Ukraine, and COVID-19 controls in China, according to a Reuters poll.

Singapore's economy grew faster than official forecasts in 2022 but slower activity in the fourth quarter points to significant risks ahead for the city-state in the new year as global demand weakens and inflationary pressures weigh.

Activity in Russia's services industry shrank for the third month running in December, a survey showed, as companies faced weak consumer demand at home, severe inflationary pressure and declining customer numbers.

Global sales of corporate bonds with environmental, social and governance (ESG) targets will rebound this year and top $460 billion, Barclays said, after the asset class had its first setback in 2022 as higher interest rates weighed on credit markets.

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