Macro Insights Weekly: Fed signals higher-for-longer

Market expectations of a dovish pivot by the Fed was put to rest last week. At least another 100bps of rate hikes are left in the cycle, in our view.
Group Research, Taimur Baig, Ma Tieying07 Nov 2022
  • Chair Powell made it clear that the Fed would hike through weak labour market data
  • The problem for the Fed is that labour market weakness is barely there
  • Interest rate increases implemented by the Fed so far have yet to cool the economy
  • Inflation forecasts point to prices in uncomfortable territory all of next year
  • The Fed’s path for higher rates, therefore, seems clear
Photo credit: Unsplash Photo

Commentary: Fed signals higher-for-longer

Jerome Powell, Chair of Federal Open Market Committee, during last week’s post-meeting press conference, made a few strong statements that underscored the Fed’s willingness to tolerate a recession to bring inflation under control. He emphasised that a sustained period of below-trend growth and some softening of labour market conditions were probably likely as monetary policy moved into restrictive territory, but such developments would not deter from staying the course “until the job is done.” Given the way the 2s-10s slope, a much widely followed recession indicator, has evolved in recent months, inverting to 50bps last week, there seems of the general agreement that Fed tightening will pave the way for the recession.

One concession to the market was the suggestion that forthcoming rate hikes would be of smaller magnitude, which is in line with our expectation that the December meeting would be accompanied by a 50bps rate hike. We then expect the Fed to hike by a cumulative 50bps through the first quarter of next year, taking the Fed Funds rate to 5%. Since our forecasts suggest that core PCE inflation will average 3.3% next year, we cannot see the Fed being able to cut rates next year.

Last week’s economic data releases kept the pressure on the Fed:

  • The jobs report released by the US Bureau of Labour Statistics showed that 261,000 jobs were created in October. At the same time though, job growth was slowing, and the unemployment rate rose to 3.7%.
  • Average hourly earnings increased by 0.4% last month, speeding up from 0.3% in September, ahead of consensus expectations.
  • Contrary to the headlines of tech companies freezing hiring or letting some workers go, economywide jobs data remain in promising territory. The number of job openings increased from 10.3mn in August to 10.7mn in September; there are now 1.9 job openings per unemployed worker.

These data points suggest that interest rate increases implemented by the Fed so far have yet to cool the economy. A tight labour market, decent wage growth, and a relatively strong consumer balance sheet have kept up the momentum with consumption, easing fears of a sharp economic slowdown in response to rate cuts. But a strong jobs market would also keep inflation on the high side. The Fed’s path for higher rates, therefore, seems clear.

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Taimur Baig, Ph.D.

Chief Economist - Global

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣

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