The Fed shocks everyone: inflation is still a long way off
As soon as the head of the Federal Reserve (the US Central Bank) began his speech at the Central Banks Forum held in the town of Jackson Hole, Wyoming, USA, a significant decline began in both the dollar and bond yields in global markets, instead of opening the door to the possibility of stopping monetary tightening. He stressed that there is still a long way to go… and as he continued to talk about uncertainty, the dollar and bonds returned to jump higher, with investors heading for more hedging.
In the closely watched speech, Powell emphasized that the continued resilience of the US economy may require further increases in interest rates… noting that the economy is growing faster than expected, and that consumers have continued to spend quickly, which are trends that could keep inflation pressures high. . He also reiterated the Fed’s determination to keep the key interest rate high until rate increases are reduced to the central bank’s 2 percent target.
“We are prepared to raise interest rates further if appropriate, and we intend to keep policy at a constrained level until we are confident that inflation is moving sustainably toward our target,” Powell said.
His speech highlighted the uncertainties surrounding the economy, and the complexity of the Fed’s response to them… It was a sharp contrast to Jackson Hole’s remarks a year earlier, when he bluntly warned Wall Street that the central bank would continue its hawkish campaign of rate hikes to rein in higher prices , according to the Associated Press.
Powell also said that the Fed believes the key interest rate is high enough to constrain the economy and cool growth, employment and inflation; But he said it was difficult to know how high borrowing costs would be to constrain the economy: “So there is always uncertainty” about the effectiveness of the Fed’s policies in bringing down inflation.
As a result, Powell said, the Fed “will tread carefully when deciding whether to further tighten monetary policy or – alternatively – hold rates steady and wait for more data.”
Confusing situations
Since Powell spoke at the Jackson Hole conference last year, the Fed has raised its benchmark interest rate to a 22-year high of 5.4 per cent. From a peak of 9.1% in June 2022, inflation slowed to 3.2% last month, though still above the Fed’s 2% target.
But sky-high loan rates have made it difficult for Americans to buy a house or a car or for companies to finance expansions. Items such as rent, restaurant meals and other services are still more expensive. “Core” inflation, which excludes volatile food and energy prices, remained high despite the Fed raising interest rates 11 times starting in March 2022.
However, the overall economy has moved forward. The job market remained healthy, bewildering economists who had expected higher interest rates to lead to widespread layoffs and a recession. Consumer spending continues to grow at a healthy rate. The US unemployment rate is exactly where it was when Powell spoke last year, 3.5 per cent, just above its lowest level in half a century.
Last June, when the Fed’s 18 policymakers last released their quarterly forecasts, they predicted that they would raise interest rates again this year. However, this expectation may have changed in light of the moderate inflation readings released by the government in recent weeks. Officials will update their forecasts for interest rates when they meet from September 19-20.
Expectations reversal
Many economists have postponed or reversed their earlier forecasts of a US recession. Optimism grew that the Fed would implement a hard “soft landing” whereby it could bring inflation down to its target level without triggering a severe recession.
Many financial market traders envision not only a soft decline, but an acceleration of growth. These expectations have helped boost bond yields, particularly the 10-year Treasury note, which greatly influences long-term mortgage rates. Accordingly, the average fixed interest rate on a 30-year mortgage was 7.23 percent, the highest level in 22 years. Car loans and credit card prices have also risen, and could dampen borrowing and consumer spending, the economy’s lifeblood.
Record exits from stocks and bonds
Amid this confusing scene, global stock and bond funds witnessed large withdrawals in the last week, amid fears that strong US economic data may keep interest rates high for a long time.
Investors also avoided putting money into riskier assets ahead of Fed Chairman Jerome Powell’s speech at the Jackson Hole conference; The expectation was that there would be more hints about the interest rate outlook from policymakers.
According to Refinitiv data, investors sold $11.1 billion net worth of global equity funds, the largest volume in a week in more than two months. They also pulled out a net $3.1 billion from global bond funds, the largest weekly net sale in about eight months.
US Treasury yields rose to their highest levels in 16 years during the week; Economic readings from the US, such as jobs and consumption, indicated stronger growth, prompting investors to scale back their expectations for policy easing next year.
US and European equity funds saw outflows of $11.07 and $1.52 billion, respectively, but Asian funds saw net purchases of $1.14 billion.
By sector, financial, technology and core consumer funds saw net sales of $734, $702 and $357 million, respectively.
Among bond funds, global high-yield funds saw weekly outflows of about $1.96 billion. Meanwhile, government and corporate bond funds attracted $2.03 billion and $209 million in inflows, respectively.
In commodities, investors trimmed their positions in precious metals funds for the 13th consecutive week, with net sales of $675 million. Energy funds also lost $164 million in outflows.
Emerging market fund data showed that equity funds faced a net sale of $2.02 billion, the largest in eleven weeks, while bond funds recorded $658 million in net sales.
widespread caution
Prior to the start of the Jackson Hole meeting, investors exercised caution in the markets, while the rise in bond yields continued to put pressure on stocks, driven in particular by gains in the technology and artificial intelligence sector. US stocks opened higher on Friday, and the Dow Jones Industrial Average increased 117.64 points, or 0.34 in cent at the opening to 34,217.06 points. The Standard & Poor’s 500 index rose at the opening by 13.07 points, or 0.30 percent, to 4,389.38 points, and the Nasdaq Composite Index rose 50.40 points, or 0.37 percent, to 13,514.37 at the opening.
On the other hand, bond yields rose on Friday morning at the level of Europe, as the standard German bond yields increased on the continent to 2.54 per cent, and the shares of real estate companies that are highly sensitive to interest rates fell 0.1 per cent.
The euro fell to its lowest level since mid-June on Friday, affected by increasing expectations that the European Central Bank could soon stop raising interest rates, while the dollar rose.
Reuters quoted eight informed sources as saying that policy makers at the European Central Bank are increasingly concerned about weak growth prospects, and that the discussion is still open. However, the momentum to pause interest rate hikes is building.
The euro fell to a new low after this report, to record its lowest level since mid-June at approximately $1.0766, and the euro fell 0.3 percent in the latest Friday trading.
The dollar index, which measures the performance of the US currency against six other major currencies, rose to its highest level since June 7 at 104.25 points. The index rose more than 2 percent in August, heading to end a two-month losing streak.
The Euro and the British Pound were negatively impacted this week as weak business activity data prompted investors to lower their expectations for further interest rate hikes in the Eurozone and Britain.
Sterling touched the lowest level since June at about $1.2560, before cutting its losses to about $1.2591. Sterling has fallen nearly 1 percent this week and is close to recording its biggest weekly drop in five weeks.
Gold prices fell on Friday, with the dollar rising to the highest level in ten weeks, but the precious metal was heading for its best performance in six weeks. Gold fell 0.2 percent to $1913.10 an ounce by 0527 GMT. US gold futures fell 0.3 percent to $1,941.30.
Gold has risen about 1.3 percent since the start of the week, which could be the first week of gains this month, with prices climbing to the highest level since August 10 on Thursday.
“Powell could bring gold back to $1,900, and he could raise it to $1,940,” said Matt Simpson, chief analyst at City Index. He added, “It is clear that the strength of the dollar is a headwind for gold.”
2023-08-26 12:16:56
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