October 6, 2022

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Chief Strategist in the Fed Chairman's speech: - Constantly pressing the button that they will run another round of triple hikes in interest rates

Chief Strategist in the Fed Chairman’s speech: – Constantly pressing the button that they will run another round of triple hikes in interest rates

Investors around the world took a close interest in Federal Reserve Chairman Jerome Powell’s speech, Jackson Hole, on Friday. The rhetoric was clear: The central bank will not back down in its fight against rapid inflation. The central bank governor said taming US inflation “will hurt American households and businesses.”

These are the unfortunate consequences of lowering inflation. And we’re going to keep going until we make sure the job is done, Powell said.

Anders Johansen, chief strategist at Danske Bank, says the important question remains what will happen at the September rate meeting, whether there will be a double or triple rate hike. In his speech, Powell indicated that the central bank will continue to raise interest rates and keep them high to tame inflation.

As seen by the market, the probability is 50/50. I hold a button for them to make another round of triple hikes in interest rates. Simply because the signs from the job market are showing that things are going well. Jobless claims are dropping slightly, so I think the Fed could raise rates sharply again and then start tightening, as the rate is now at a neutral level, Johansen says.

Johansen noted that the Fed has been clear that it is relying on reports on the economic situation leading up to the new interest rate meeting in September. If new numbers emerge, especially from the labor market, that could change, he believes and adds:

Overall, it’s a clear message that they will continue until “the job is done,” as Powell said.

Waiting for slack

DNB Markets chief economist Knut Magnussen told DN Friday that the Fed chief is very clear.

It will raise the interest rate further and keep it high to reduce inflation. It will affect the economy in terms of the labor market, which will weaken, and it will be tougher on families.

DNB Markets' Senior Economist, Knut Magnussen, focuses primarily on the US and UK economy.

DNB Markets’ Senior Economist, Knut Magnussen, focuses primarily on the US and UK economy. (Photo: Michaela Berg)

The DNB economist was not particularly surprised by the Fed chair’s comments.

What the market is now wondering is whether the next rate increase will be 0.5 percent or 0.75 percent, says Magnussen.

Yesterday’s new estimate came from DNB Markets that expects the US to enter a recession in the second quarter of 2023. Magnussen still holds this belief.

– Based on what he says, the economy should slow down, but he doesn’t use the word recession. I think our estimates are holding up, but we think it will be a mild recession.

Wall Street’s major indexes opened mixed on Friday, but as Powell began speaking, all three indexes turned significantly lower. During the speech, the indicators managed to turn higher, before all three fell slightly towards the end.

Stock markets turned a bit during the speech, but no drama. Magnussen says the market may have had little hope of the next 0.5 per cent rate hike.

Interest rate hiked three times in July

The meeting at Jackson Hole comes after the Federal Reserve raised its key interest rate again in late July by 0.75 percentage points.

The background to interest rate hikes is the rampant inflation that is sweeping across the United States, like large parts of the rest of the world. In June, inflation in the United States was measured at 9.1%, the highest level since 1981.

The previous question was about “how much” and not “whether” the central bank would raise interest rates. Although the increase in interest rates negatively affects the stock markets, US stock indices rose that evening.

In other words, the exchange accepted an interest rate increase of 0.75 percentage points.

In a note from the Interest Rate Committee, it was highlighted that job growth has been strong in recent months, while unemployment has remained low. The committee pointed out that the continued rise in inflation rates reflects imbalances in supply and demand linked to the epidemic, high food and energy prices, and greater pressure on prices.

important inflation indicator

This week saw the end of the summer stock market rally on Wall Street. In recent days, there have been new figures that the central bank is closely following.

New figures on Friday showed core price inflation rose 4.6 percent year-on-year in July. The numbers show how Americans spend their money, one of the Federal Reserve’s favorite inflation measures. The main price increase does not include food and energy prices. Total prices rose by 6.3 percent.

On Thursday, revised second-quarter GDP figures showed a 0.6 percent decline in the United States.

The drop follows a 1.6 percent drop in the first quarter. Recently, questions have been raised about whether the US economy is really in a recession, which is often determined by the economy falling for two consecutive quarters.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using the links that lead directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.