All eyes on Fed, Greece after ECB fires bazooka

Sun Jan 25, 2015 4:39am EST
 
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By Ingrid Melander

PARIS (Reuters) - After the surprises from central banks which rocked markets at the start of the year, the U.S. Federal Reserve will be watched as closely as ever this week to see that it doesn't stray from its own policy path.

The atmosphere will already be tense as the fallout from Sunday's snap election in Greece settles and concern has grown in some quarters that central banks, which played such a big part in guiding economies through the financial crisis, are becoming less predictable.

The shock of the Swiss National Bank abandoning its cornerstone currency cap had yet to fully subside when the European Central Bank said it would flood markets with over a trillion euros, more than expected, to prevent the euro zone from sliding into deflation.

Canada also cut its rate out of the blue and Denmark did so twice to navigate a world of tumbling oil prices and weak growth.

Now, after Europe mostly dominated the start of the year, attention will turn to the Fed's rate-setting meeting on Tuesday and Wednesday for any sign that its resolve to start raising interest rates mid-way through the year could be softening.

Expectations are for the U.S. central bank to stick to its guns despite the turmoil elsewhere, with top Fed officials citing in the past weeks strong U.S. economic momentum and falling unemployment.

But questions have been raised due to weak wage growth and five-year low oil prices that have dragged U.S. consumer prices down to their biggest drop in six years in December and heightened deflation fears in Europe.

"What we will focus on in January’s statement, which could challenge our view about a June lift-off, are any hints of increased concern that very low headline inflation is putting downward pressure on inflation expectations," analysts at BNP Paribas wrote in a note. "Any mention of foreign developments would also be dovish."   Continued...

 
The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron