San Francisco Fed: The Federal Reserve is expected to make"strong and systematic" responses to inflation and employment conditions in the United States.

The research report released by the San Francisco Fed on Monday shows that investors and analysts expect the Federal Reserve to make a "strong and systematic" response to changes in inflation and the labor market. The report highlights the sensitivity of the current financial markets to US economic data. The Fed's response to economic data has been significantly enhanced in 2022, driven first by inflation data last year and now by labor market data, based on analysis of professional forecasts and the latest Economic Letter published by the regional Fed. This finding is consistent with the Fed's actual response to inflation, as inflation in the US rose in 2021 but did not prompt interest rate hikes until 2022. It also aligns with the Fed's response to labor market data, as weakness in employment data last year led the Fed to start lowering the policy rate by a full percentage point starting in September. The Fed's target policy rate is currently between 4.25% and 4.50%. Recent weaker economic data, including a survey released on Friday showing business activity dropping to a 17-month low this month, has reinforced market expectations of two 25-basis-point rate cuts this year. Concerns about stagnant economic growth seem to outweigh concerns about rising inflation, which has been evident in recent surveys regarding market bets on how the Fed will respond to monetary policy. Current pricing expectations for interest rate futures contracts suggest that the Fed's first rate cut this year will occur in June, with a second cut potentially taking place as early as October.