The Fed or the False Suspense

During its latest committee meeting, the FOMC suspended its interest rate hikes after ten consecutive moves over 15 months. At the same time, policymakers projected two additional increases later this year, a puzzling outcome that left investors looking for answers.

The minutes of the last committee meeting provided little clarity on the reasoning behind the decision. Chairman Jerome Powell delivered a confusing message, reflecting an uncomfortable compromise within a divided committee.

On the contrary, the US unemployment figures released this week leave little doubt about a rate hike at the next committee meeting. The data demonstrated the continued strength of the US job market. Private sector payroll increased by 497,000 last month, marking the most significant gain since February 2022, more than double the consensus expectations. Wage growth, on the other hand, has slowed down.

Workers who retained their jobs experienced a 6.4% increase in wages in June compared to a year ago. The median annual wage increase was 11.2% for those who changed jobs. Both have increased at a slower pace since 2021, but they remain historically high.

The widespread increase in hiring, coupled with a relatively low level of unemployment claims, speaks to the resilience of the country’s labour market. Although there are pockets of weakness, particularly in the technology and finance sectors, the overall outlook remains positive.

The Personal Consumption Expenditures Price Index, the Fed’s official target, increased in May at the slowest annual pace in over two years. However, policymakers have focused more on core prices, which exclude the most volatile elements: food and energy. Core prices increased by 4.6% compared to May 2022. The problem is that the economy has continued to outperform expectations, and inflation has proven to be sticky, which could keep the FOMC in a hawkish position for some time.

Two rate hikes before the end of the year remain the most likely option, especially considering that banking regulation reform is set to take effect early next year, with implications that are not favourable for interest rate hikes. The banking sector will have to increase its liquidity by nearly 20%, putting upward pressure on short-term rates.

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