Goldman postpones additional hike expected date to December… The Federal Reserve also takes a cautious approach
There is room for a wait-and-see approach to rising long-term interest rates... Strong consumption and economy are variables for year-end hikes
The prospect that the U.S. Federal Reserve (Fed) may freeze the Base Interest Rate in October and delay further increases until the end of the year is gaining ground. Not only was the inflation rate lower than expected, but key figures at the Federal Reserve also stated that there was no need to rush the next decision. The September employment report, which will be released on the 2nd (Korean time), is expected to be key data to determine whether the Federal Reserve can afford to wait.
The opportunity to change the mood was the August personal consumption expenditure (PCE) price index announced on the 30th of last month. The PCE price index rose 3.4% compared to the same month last year, and the core index excluding food and energy rose 3.0%. Past figures have also been lowered due to statistical revisions. The July increase rate was adjusted for the overall index from 3.7% to 3.4% and for the core index from 3.3% to 3.0%. It was revised to show that price pressure was not as strong as the previously announced figures.
Accordingly, Goldman Sachs delayed the expected timing of the next interest rate increase from October to December in a report on the 30th of last month. While maintaining the outlook for additional hikes, it was assessed that there is a significant possibility that the Federal Reserve will determine that there is no need to raise rates further depending on future indicators. Stephen Brown, chief North American economist at Capital Economics, also explained that weaker-than-expected price pressures support the existing October freeze forecast.
Comments by Federal Reserve officials also emphasized the possibility of taking a closer look at the economic situation rather than immediately raising interest rates again. John Williams, president of the Federal Reserve Bank of New York, said in a speech on the 29th of last month that there was no need to rush as interest rates were raised in September and that there was time to gather additional information. He also suggested that if the economy moves as expected, another increase later this year may be appropriate.
Philip Jefferson, Vice Chairman of the Federal Reserve, also emphasized in a speech on the 1st that the next policy should be decided by examining economic indicators and forecasts. He noted that market interest rates for several maturities have risen further since the September meeting, and explained that it may take longer for the Fed to make a decision.
The rise in long-term interest rates can be interpreted as a factor giving the Federal Reserve room to wait. If long-term interest rates rise, mortgage interest rates and the cost of borrowing money for companies may also rise. This has a calming effect on the economy as households' home purchases and corporate investments decline. If market interest rates remain high, the Fed could see this effect before successively raising the Base Interest Rate.
Nevertheless, the reason why additional hikes are expected at the end of the year remains because prices are still above the Federal Reserve's target of 2% and consumption is also strong. Real consumer spending in August increased 0.6% from the previous month. Even though the price figures came out lower than expected, it is difficult to say that demand in the U.S. economy has clearly cooled.
Sal Guatieri, senior economist at BMO Capital Markets, also pointed out this point. He assessed that the lowered price figures immediately after the PCE announcement could provide room to skip the October increase. At the same time, considering high prices and solid consumption and economy, it was predicted that there would be a need to raise it once more by the end of the year.
Bank of America's analysis reported by Market Watch on the 1st also focused on strong growth. It was believed that the upward adjustment of the growth rate suggests improved productivity and a rise in the ‘neutral interest rate’. The neutral interest rate is an interest rate level that neither overheats nor contracts the economy. If this level had risen, the effect of existing interest rates on suppressing the economy may have been weaker than expected. Accordingly, Bank of America evaluated that it is necessary to reexamine whether the Federal Reserve's monetary policy over the past few years has actually been at the level of suppressing the economy.
Now attention turns to employment. The U.S. Bureau of Labor Statistics will release the September employment report at 9:30 p.m. on the 2nd, Korean time. Market expectations compiled by Dow Jones are for an increase of 84,000 non-farm jobs and an unemployment rate of 4.1%. If as expected, the increase in employment will be less than the 162,000 in August.
If employment remains stable and upward wage pressure eases, the outlook for an October freeze could receive further support. If solid consumption supports growth and the price burden falls, the Federal Reserve can secure room to further examine the economic situation without rushing to raise additional rates.
