| Hello. Today we look at whether China's rebound will force the Fed to stay hawkish for longer, how interest rates are starting to top inflation levels and what Bloomberg Economics is thinking. Back in September 2016 as then-Chair Janet Yellen mulled the Federal Reserve's first interest-rate hike in almost a decade, China's economic and market wobbles were among reasons she ended up staying her hand. It was a sign of China's growing heft and marked the first time the Asian nation's fortunes had so clearly affected policy at the all-powerful Fed. This year, history may be about to repeat, or at least rhyme, with Jerome Powell's plans to slow his inflation fighting campaign set to be complicated by China's rapid recovery after the sudden end of Covid-Zero restrictions. The reopening will provide a boost to global growth, offsetting weakness in Europe and a looming recession in the US, Bloomberg's reporters and economists write in today's BigTake. The catch: It'll also boost inflation. Bloomberg Economics forecasts an acceleration in China's GDP to 5.8% in 2023 from 3% last year. Modeling the relationship between China's growth, energy prices and global inflation suggests that'll push up consumer prices. Indeed, there are already signs that China's recovery is gathering steam. Data Tuesday showed purchasing managers indexes sprang back into expansion territory in January. And the likely continuation of that recovery was a large reason behind the IMF's improved global growth forecast. If China's rebound keeps US inflation stuck around 5% in the second quarter — which Bloomberg Economics's model suggests is possible — that might frustrate expectations for the Fed to halt hikes at its May meeting. Price pressures from China will likely transmit through two channels: - The risk of a negative supply shock as a wave of Covid infections trigger a flurry of absenteeism and factories struggle to keep up — an echo of the supply snarls that helped drive the first surge of pandemic inflation.
- Then comes the positive demand shock as normal life resumes and purchases are amped up. There were already signs of that over the Lunar New Year holidays if restaurant and cinema numbers are a guide.
Taken together, those shocks could add close to one percentage point to global inflation at the end of 2023, relative to a scenario where China stayed locked down, according to Bloomberg Economics. So it's easy to understand why Kristalina Georgieva, the head of the IMF, said this month that China's pivot from Covid Zero is probably the single most important factor for global growth this year. —Malcolm Scott Setting aside that potential China complication for now, Fed officials are on track to consider pausing rate hikes following their March meeting if more evidence of cooling inflation rolls in, Catarina Saraiva reports here. That's based on a timeline sketched out by one of the Fed's most closely watched hawks, Governor Christopher Waller, who was an early advocate of the Fed's front-loading rate-hike strategy last year. "The argument is just whether you should pause after three months of data or pause after six months of data," Waller said on Jan. 20. "From the risk management side — I need six months of data, not just three."
The core personal consumption expenditures index rose 2.2% in the three months through December on an annualized basis, and 3.7% over the past six months, a slowdown from its 4.4% pace in the last 12 months. Should these trends continue for three more months, per Waller's benchmark, policymakers could have seen enough to be confident of pausing by their May 2-3 meeting, when they will have data for January, February and March in hand.  | - Battling bulls | China isn't Powell's only headache. Nobel laureate Paul Krugman worries investors have put inflation risk in the rear-view mirror too soon, and that easing financial conditions could spark it again.
- Dovish debate | Yellen, meanwhile, remains on the dovish side of the inflation debate, saying persistently weak prices are likely to return as a long-term challenge for the economy.
- Surprise growth | The euro area is on course to avoid a recession after unexpectedly growing at the end of 2022, despite double-digit inflation and Russia's invasion of Ukraine.
- BOJ bets | Two Bank of Japan veterans continue to lead the field to replace Governor Haruhiko Kuroda as investors mull the risk of Prime Minister Fumio Kishida's choice jolting global financial markets.
- Bartender bonuses | Sign-on bonuses to lure bartenders, chefs and waiters in New Zealand are the latest illustration of how tight labor markets are keeping interest-rate hikes in play even as economies slow.
- Three years on | The UK marks the anniversary of Brexit losing £100 billion a year and the areas which voted to leave the European Union lagging further behind. The IMF also had grim news.
A key gauge of how tight monetary policy is compares the central bank's benchmark interest rate with the pace of inflation. Imagine your savings are earning 3%, but the cost of living is climbing by 4%. To preserve purchasing power, you might be better off buying more stuff than parking cash in savings. But if rates are higher, that gives you the incentive to save — in turn helping the central bank in its inflation fight. For Steven Blitz, chief US economist at TS Lombard, the most important takeaway from Thursday's GDP report was "rates are finally above inflation." The broad inflation gauge in GDP was 3.5% last quarter, less than the Fed's 4.25% to 4.5% target. And that turning point means the Fed's expected move on Wednesday "has all the earmarks of being the last hike," he said in a note to clients. See what Anna Wong of Bloomberg Economics has to say on the Fed… Read more reactions on Twitter | 
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