US CENTRAL BANK TO EASE THE PACE OF RATE RISES?

14.10.2022 Global stock markets are looking closely at the US economic data for signs of a moderation in economic growth. Below we assess the outlook for the US economy and the pace of interest rate rises.

In response to high inflation the US central bank, the Federal Reserve, has raised interest rates from 0.25% to 3.25% this year. A further three quarters of a percentage point rise to 4% is expected at the beginning of November.

The annual inflation rate is currently 8.2%, down from a peak of 9.1%. Weaker oil prices and decelerating goods price inflation have been behind this drop. Indeed, global manufacturing looks set to dip into recession while supply chain disruption is also abating. However, service sector inflation in the United States remains stubbornly high at 6.7 %. This reflects strong wage growth, resilient demand and large rent increases (driven by rampant house price inflation).  Whilst there are clear indications of a slowdown in the housing market, new home sales have fallen 20% over the last year, the labour market is still very tight with the unemployment rate hovering around 3.5%.

We think that, at its November meeting, the Federal Reserve will likely signal a slower pace of rate rises going forward. This is because between 2009 and 2021 the official interest rate was, for the most part, 0.25%.  Between 2016 and 2020 interest rates were a little higher with a peak rate of 2.5% in 2019. This year’s rapid and unexpected rise in interest rates could have very negative effects on the real economy. Furthermore, as the impact of interest rate rises take at least a year to fully take effect, no one knows for certain how severe the consequences might be.

What global stock markets are really looking for is a signal that the Federal Reserve is willing to pause its cycle of interest rate rises. However, this will have to wait until there are clearer signs of a slowdown in service sector growth and a loosening of the labour market.

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