HAS THE US CENTRAL BANK FINISHED RAISING INTEREST RATES?

24.10.2023 Markets have been unsettled by the fact that the US central Bank is contemplating another rate rise before year end. Below we look at the outlook for US interest rates.

Headline annual US inflation fell to a low of 3% in June but has since risen again to 3.7% on the back of higher oil prices. However, the main area of concern is a very tight labour market with the unemployment rate of 3.8%, close to a multi-decade low. Whilst employment growth remains robust salary increases have moderated over the last year.

The fact that the US central bank is contemplating another interest rate rise, and only envisaged modest cuts next year, caused interest rates on US bonds to rise sharply. However more recent commentary from officials suggests that, because higher market interest rates have fed through into mortgage rates, it probably won’t raise rates at its forthcoming November meeting. Certainly, slowing housing rent inflation should help push inflation lower in the next couple of quarters.

The scope for interest cuts next year will largely depend on the evolution of the unemployment rate. This is because it is one of the purest measures of capacity utilization of an economy. Indeed, it seems unlikely that the US central bank would be comfortable cutting interest rates unless the unemployment rate was around 4.5% (it is currently 3.8%).

The monetary policy stance of the US central bank is important as it tends to set the tone for financial markets. A US central bank that had finished raising interest rates would be beneficial for stock market sentiment.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin