Fed to remain hawkish but may slow rate rises

THE central bank hiked interest rates by 75bps for the fourth consecutive time at the beginning of November as it continues its battle to beat down inflation.

Despite the encouraging decline of core inflation, which saw a 0.3 percentage point drop from september to 6.3%, the Fed is widely expected to continue its hawkish approach, with industry commentators anticipating a further 100bps of interest rate rises before the Fed may opt to pause its hiking cycle.

However, Kingswood chief economist Rupert Thompson suggests a 50bps rise is now more likely at the Fed’s next meeting on 13 December.

Willem sels, global CIO at HSBC Private Banking and Wealth Management, adds: “The most important news comes from the bigger than fall in core inflation, which is the number the Fed is really focused on. Economists were hoping to see a decline but had been disappointed before, as core inflation has been annoyingly sticky.

“some components of core inflation, such as transportation costs and price rises due to supply chain bottle necks and semiconductor shortages, had already been easing recently. But Us services price inflation, including rents, leisure and entertainment prices had continued to rise. This is mainly because of strong labour markets, which have caused households to continue to spend.

“The decline in core inflation is a good first sign, but for markets to be certain that inflation will continue to ease, we will need to see some weakening of the Us labour market from the very strong levels. The Fed has said before that it is willing to hike rates to the point where unemployment starts to rise in order to slay the inflation dragon.”

sels continues: “We think the Fed will continue to hike rates to 5% and then keep them there throughout 2023 or even longer. it is only when the Fed finishes its rate hikes and the global economy is showing signs of stabilisation that equity markets can see a sustained bounce.”

According to seema shah, chief global strategist at Principal Asset Management, the decline in inflation will be received by “an equity market ovation”. (The Portfolio Advisers)