Fed Expected to Respond Strongly to Inflation, Job Market Conditions, Research Shows
Investors and economists expect the U.S. central bank to respond "strongly and systematically" to changes in inflation and the labor market, according to research published on Monday by the San Francisco Fed that underscores the current sensitivity of financial markets to U.S. economic data. The Fed's perceived responsiveness to economic data picked up notably in 2022, driven first by inflation data and, last year, by labor market data. Recent weaker economic readings have helped firm up market bets on two quarter-percentage-point reductions to the policy rate this year.
- This heightened sensitivity of financial markets to U.S. economic data may be a sign that investors and economists are increasingly relying on monetary policy as a means of stabilizing the economy, highlighting the need for careful consideration of the potential consequences of such actions.
- How will the Fed's responses to inflation and labor market conditions impact the broader global economy, particularly in countries with weaker currencies or less developed financial systems?