Macro Insights Weekly: Fed signals higher-for-longer
- 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
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.
To read the full report, click here to Download the PDF.
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.