The S&P 500 begins the week at record highs after Federal Reserve Chairman Jerome Powell announced last Friday that the withdrawal of stimulus will begin this year. Of course, it left a wide margin of maneuver and drew a clear difference between the reduction of debt purchases and the next rise in interest rates.

That said, despite the fact that the guardian that watches over full employment and price stability reiterated that the current rebound in inflation will be transitory, the market is beginning to align itself with the monetary hawks within the Federal Open Markets Committee (FOMC). , for its acronym in English).

Way to go
Although Powell assured that the first rate hike will have a stricter test and that “there is still a long way to go”, futures on potential changes in US monetary policy take for granted that the first turn of the screw in the price of money It will be produced at the end of next year. In other words, they are in favor of the seven out of eleven members of the FOMC who in the most recent projections favored at least one increase.

According to the data collected by the CME Group FedWatch indicator, for the meeting of December 13 and 14, 2022, 39.9% of the market already discounted a 25 basis point rise in rates. Up to 17% consider that by then the rates will move between 0.50-0.75% (which would imply 2 rate hikes) and another 3.4% observe them between 0.75% and 1% ( that is, they see up to three rate hikes over the next year).

Only 39.4% believe that the Fed will not make a move throughout 2022, something that would imply that either the labor market has a hard time returning to pre-pandemic levels, when the unemployment rate was around 3.5%, or that the runaway inflation on personal consumption expenditures (PCE), which rose 4.2% year-on-year in July, its highest level in 30 years, will really relax in the end.

An opinion that does not seem to share former Secretary of the Treasury of the United States, Lawrence Summers, who considered that the “serene” description of inflation offered by Powell is misinterpreting the risks. “There are no certainties, but I think the inflation risks are more serious than those recognized by the president (in reference to Powell),” he said in statements collected by Bloomberg.

Some critics of the Fed fear that the combination of very low interest rates and high government spending will keep inflation well above the US central bank’s median target of 2% well into next year and intensify pressure on consumers. With global supply chain and logistics bottlenecks appearing to persist into 2022 and labor costs continuing to rise, inflation could prove more stubborn than many have been anticipating, “warns Richard F. Moody, chief economist. from Regions Financial Although the US economy has quickly outgrown last spring’s recession, there is still considerable dispersion in the degree of recovery across industries and demographic groups.

The Fed must redefine full employment and its new goal of greater inclusivity
Some sectors have more than fully recovered to pre-pandemic rates, including residential investment (+ 12% above trend), consumption of durable (+ 13%) and non-durable (+ 9%), and investment in software (+ 3.5%), which has benefited from changes in preferences for the pandemic, teleworking, and the support of monetary and fiscal policy. Even so, investment in high-contact consumer services and structures remains depressed, especially entertainment (84% below trend), public transport (-41%), investment in offices (-34%) and the accommodations (-26%).

From a labor market standpoint, black, Hispanic, and college-educated workers have seen greater increases in unemployment than other demographic groups, although the increases have been less disproportionate than in previous cycles. Under the new broad and inclusive interpretation of the Federal Reserve’s maximum employment target, this uneven recovery in the labor market could have negative consequences for monetary policy in the future. Federal Reserve officials are talking more about how to define a fuzzy concept that will greatly influence your thinking about how long to keep interest rates close to zero.

The employment data for August will set the course for “tapering”
For now, as Paul Ashworth, chief economist at Capital Economics notes, “Several Fed hawks have pushed for the taper to be announced at the next meeting in September. But even if we see another good employment data in August, we suspect that the threat of the Delta variant means that most officials will want to wait until the November meeting to give the green light, “he says.

Goldman Sachs economists have increased the odds that the Fed will announce the start of reducing its bond purchases in November, predicting that it will likely choose to reduce purchases by $ 15 billion ($ 10 billion in Treasuries and another $ 5,000 million). million in MBS) and keep up with subsequent meetings. “If upcoming milestones, such as the August employment report, come without major downside surprises, the odds of an announcement in November will increase,” says Jan Hatzius, Goldman’s chief economist.

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