Inflation outlook in the US
At its last meeting on November 2, the Federal Reserve announced its decision to keep the federal funds rate in a range of 5.25% to 5.50%. However, Fed Chairman Jerome Powell noted that this decision should not be confused as a signal that the Fed is done with the tightening cycle. He said the central bank intends to keep the option of further rate hikes if data suggests that the slow decline in inflation has stopped. The Fed’s favorite metric for inflation is the Personal Consumption Expenditures (PCE) price index, which showed a slight weakening in September. Inflation was 3.7% in September, down 0.1% from August.
Federal Open Market Committee (FOMC) member Philip Jefferson recently softened his stance on the need for rate hikes, primarily due to higher bond yields reflecting future rates. Fed members, such as Patrick Harker and Raphael Bostic, have argued that monetary policy and interest rates are high enough in the market to drive inflation down to 2%.
US economic resilience
The US economy recorded its highest economic growth rate in two years in the third quarter, up 4.9%. This strong economic performance underscores the strength of the domestic economy and suggests a solid foundation for future growth. In addition, the US labour market has been in excellent shape despite tightening monetary policy. Moreover, employers expanded their supply by 336,000 jobs in September, the largest increase since January of this year. The unemployment rate held steady at a low 3.8% in October. Moreover, wage growth continued to outpace inflation.
Bond yields
Fed Chairman Jerome Powell, also pointed to soaring long-term bond yields affecting the economy’s trajectory. Treasury yields have been rising for the past year and a half thanks to the Fed’s actions. However, there have been concerns about already high yields, which have been rising due to low demand and buyer appetite for longer-dated bonds. This phenomenon is known as the “term premium”, which represents additional compensation to investors for holding bonds for longer periods of time.