US Fed official favors smaller rate hike in February

There is ample evidence that a steep climb in interest rates has dampened demand and economic activity, suggesting the US central bank can further slow its rate hikes, Federal Reserve Governor Christopher Waller said Friday.

Nearly a year since the Fed started tightening monetary policy to curb surging inflation, industrial production has fallen and the construction and real estate sectors have slowed, while consumer spending growth has started to ease.

Inflation has been moderating as well, coming down from a blistering 40-year high last June to 6.5 percent in December.

"Based on the data in hand at this moment, there appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the (Fed's) next meeting," Waller said in prepared remarks for an event in New York.

Over the past year, the Fed has raised rates seven times including four steep 75-basis point jumps before slowing to 50 basis points in December. Fed wants 'flexibility' on rates as inflation remains key focus, minutes show

But Waller warned that policymakers have "a considerable way to go" towards their two percent inflation goal.

"I expect to support continued tightening of monetary policy," he said. While inflation has cooled, a major reason recently has been a significant drop in energy prices.

Stripping out the volatile food and energy segments, core inflation ticked up from November to December, signaling cause for caution, Waller noted.

"While it is possible to take a month or three months of data and paint a rosy picture, I caution against doing so," he said.

But the labor market remains robust, showing that jobs and income can hold up despite rising interest rates. The United States has so far managed to make progress on lowering inflation without seriously hurting the labor market, Waller said.

"I remain optimistic that this progress can continue," he said. That marked a second monthly decline in a row after a drop of 0.5 percent in November, the ONS said. “Retail sales dropped again in December, with feedback suggesting consumers cut back on their Christmas shopping due to affordability concerns,” said Heather Bovill, ONS deputy director for surveys and economic indicators.

Shoppers also curbed expenditure last month as wintry weather sparked soaring energy bills, while many had made their festive food purchases in November.

“Even Santa has bills to pay and when the household budget is feeling uncomfortably tight the only choice available is to spend less,” said AJ Bell analyst Danni Hewson.

“For most people the fact the inflation number is falling doesn’t mean anything.” The outlook darkened further Friday as a key survey showed consumer confidence collapsing close to a near-record low. GfK’s Consumer Confidence Index dropped three points in

January to minus 45, close to the historic nadir struck in September.

However, the rate remains close to a fourdecade high that is causing mass strikes by workers, including nurses, teachers and the railway sector as they fight for wage increases to keep pace with inflation.

Inflation has galloped to its highest level in decades around the world, propelled by surging energy bills after key gas producer Russia invaded Ukraine almost one year ago.

Yet a recent drop in wholesale energy costs has fuelled hope of falling domestic electricity and gas bills this year, soothing inflationary worries in Britain and elsewhere.

Bank of England governor Andrew Bailey on Thursday forecast that inflation would fall “quite rapidly” this year and that “a corner has been turned” with the December slowdown from 10.7 percent in November.