US Federal Reserve tries to assert itself
Please note: The article does not constitute advice or any form of investment recommendation.
As storm clouds continue to gather over the US economy, there is greater pressure on the world’s most influential central bank – the US Federal Reserve (Fed) – to assert its authority.
Having swiftly shaken off the initial “transitory” label, post-lockdown inflation has left an ugly footprint across global economies this year. In response, the Fed has been accused in some quarters of being late-to-the-party in addressing it. And so it fell to Fed chair Jay Powell, to announce the decision to hike US rates once again by 0.75%. It was the third 75bp hike in a row, bringing the fed funds target range to 3.00%-3.25%.
In many ways, the hike isn’t ‘new news’. Markets – which are typically forward-facing - had already priced it in because the reality of rising prices, consumer behaviour and a tight labour market, left policymakers with little alternative but to hike. Observers were arguably more interested in two areas:
- How fervent the central bank felt it needed to be
- What specific messaging it used to explain its decision
Getting a firmer grip
Reflecting the scale of current macroeconomic challenges, the Fed yesterday struck a more-hawkish-than-anticipated tone, underpinned by its new projections.
In trying to make up for lost ground this year, the new ‘dot plot’ – (ie: the short-term projection of interest rates) - now suggests a median rate at 4.4% by the end of 2022, and 4.6% in 2023.
In contrast to previous messaging, when the US central bank emphasised that policy must adjust with the “totality” of the data, it seems it has high confidence in its new plan. In the words of Mr Powell: "The path that we actually execute will be enough. It will be enough to restore price stability1".
Yesterday’s announcement signalled that the Fed has dropped its dual mandate – (maximum employment and price stability) – to focus fully on inflation.
With regards to the 2% inflation target, chair Powell commented that, “the chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer. Nonetheless, we’re committed to getting inflation back down to 2%1”.
The central bank appears willing to sacrifice growth and is determined to cool the job market. While the unemployment rate has shown some signs of easing lately, policymakers seem concerned about the elevated rate of job quits and the high level of job openings, which continue to put pressure on wage growth.
It remains uncertain at what stage the US economy may find its longer-term equilibrium. While we don’t believe it will be a triple 5% with regards to unemployment, policy rates, and inflation (on the way to the Fed’s target), it may not be very far off from this. By now, and especially after the U-turn in 2019, it is also evident that the path of the US economy and the market may play out differently and may need to be adjusted.
A moderation of inflation seems still very likely given various factors like base effects, a rapidly cooling housing market, and disinflationary trends in components like airfares, autos, health insurance, and some materials.
As such, a CPI below 3% by the end of 2023 seems plausible. While a fed rate of 4.5-4.75% at the peak by the first quarter of 2023 now appears more likely, so are interest rate cuts at the end of next year.
Only time will tell whether yesterday’s more aggressive tone and shift in mandate (at the expense of growth), will be enough for the Fed to restore confidence. After recent months of reactive decision-making and foggy communication, chair Powell will be hoping he’s done enough.
This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.
This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.
- is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;
- is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;
- is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and
- has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.