Month: September 2023

The US Fed expects interest rates to fall only half a percentage point in 2024, lower than market expectations.

Federal Reserve Chairman Jerome Powell arrives for a House Financial Services Committee hearing in Washington DC, US. The US Fed has ‘dialled up its expectations’ for a soft landing of the economy despite higher interest rates for longer [File: Andrew Harnik/AP Photo [Andrew Harnik/AP Photo]

The United States Federal Reserve held interest rates steady on Wednesday but stiffened its hawkish stance, with another rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected.

As they did in June, Fed policymakers at the median still see the central bank’s benchmark overnight interest rate peaking this year in the 5.5 percent to 5.75 percent range, just a quarter of a percentage point above the current range.

But from there the Fed’s updated quarterly projections show rates falling only half a percentage point in 2024 compared with the full percentage point of cuts anticipated at the meeting in June.

With the federal funds rate falling to 5.1 percent by the end of 2024 and 3.9 percent by the end of 2025, the central bank’s main measure of inflation is projected to drop to 3.3 percent by the end of this year, to 2.5 percent next year and to 2.2 percent by the end of 2025.

The Fed expects to get inflation back to its 2 percent target in 2026, which is a later date than some officials had thought possible.

“Inflation remains elevated,” the rate-setting Federal Open Market Committee (FOMC) said in a policy statement that included projections incorporating stronger economic and job growth than prior forecasts, and keeping prospects for a “soft landing” squarely in view.

Financial markets had widely expected that the Fed would leave rates unchanged. But investors have also been banking on significant Fed rate cuts next year, an expectation clouded by the projections showing 10 of 19 officials see the policy rate remaining above 5 percent through next year.

After the release of the statement and projections, bond yields moved higher in the face of a higher-for-longer monetary policy stance, with the two-year Treasury note rising to its highest level since 2007. Stocks initially weakened while the dollar erased its losses for the day against a basket of major currencies.

Economic growth

The new projections include a substantial markup of projections for economic growth: After expecting growth as weak as 0.4 percent for this year in earlier projections, the Fed now sees the economy growing 2.1 percent in 2023.

The unemployment rate is also seen remaining steady at about 3.8 percent this year and rising to just 4.1 percent by year’s end – a vote of confidence in the possibility of containing the worst breakout of inflation since the 1980s without significant job losses.

But the projections also threaten companies and households with the possibility of even tighter credit conditions and higher borrowing costs than they have already absorbed during the Fed’s aggressive two-year battle to contain inflation, embodying a philosophy of “higher for longer” into the latest projections.

In the wake of the Fed statement, economists saw central bank officials as more confident they will be able to quash inflation without causing broader economic pain.

“The message conveyed in their upward revision to growth and their downward revision to the unemployment rate in 2024 clearly indicate a Fed that has dialled up their expectation for a soft landing, despite higher for longer rates,” said Olu Sonola, head of US economics at Fitch Ratings.

The Fed’s forecasts caught some observers off-guard, especially in the new view of a slower-than-thought decline in inflation pressures. Omair Sharif of forecasting firm Inflation Insights said that given the Fed outlook it was not surprising to see a hawkish shift in the monetary policy outlook, while adding that when it comes to officials’ outlook, “it’s oddly optimistic on the labour market and equally oddly pessimistic on core inflation this year.”

The Fed statement was approved unanimously after a two-day meeting that marked new Fed Governor Adriana Kugler’s debut on the central bank policymaking stage.

SOURCE: REUTERS

The latest report released by the Bureau of Labor Statistics (BLS) showed that the U.S. labor market added 187,000 jobs in August 2023. Despite this steady pace of hiring, the unemployment rate jumped 0.3 percentage points to 3.8%, marking its highest level since February 2022.

The headline number of 187,000 additional jobs in August represents an uptick from the downwardly-revised 105,000 and 157,000 positions added in June and July, respectively. However, August jobs growth still marks a continued cooldown from the average monthly gains of 271,000 jobs reported over the prior 12 months.

While the unemployment rate rose to an 18-month high in August, the 3.8% level remains relatively low by historical standards. The jump in unemployment also came amid an increase in job seekers, as the civilian labor force grew by 736,000 during the month.

“The whisper number, or unofficial forecast, for August payrolls was weaker than the 187K gain we got, so that is encouraging. While some might be concerned about the uptick in the unemployment rate from 3.5% to 3.8%, it looks like it is mostly driven by an increase in the labor force as opposed to a jump in those unemployed,” remarked Shawn Snyder, Executive Director, Global Investment Strategist for J.P. Morgan. The BLS counts only those who are actively looking for work in its unemployment calculation, so the number of workers entering or rejoining the job market contributed to the uptick in the unemployment rate.

Although the persistent level of hiring suggests that the labor market remains resilient, the BLS also reported a more moderate pace of wage growth in August, which could indicate a reprieve in inflationary pressures. Average hourly earnings for all employees rose 0.2% in August, compared with a bump of 0.4% reported in July. This caused the year-over-year (YoY) wage increase to dip to 4.3% from the level of 4.4% recorded in the previous month.

Jobs growth in the construction industry trended higher in August, with gains of 22,000 slightly higher than the average monthly additions of 17,000 over the prior 12 months. Employment in social assistance saw similar results, with August’s increase of 26,000 topping the monthly average of 22,000 jobs added over the previous year. Healthcare posted strong gains, adding 71,000 positions in August. Despite monthly gains of 40,000 in leisure and hospitality, employment in the industry remains 1.7% below the pre-pandemic level of reported in February 2020.

Weakness in the labor market was concentrated in the transportation and warehousing industry, which shed 34,000 jobs in August. These declines stem primarily from the closure of a key trucking business.

Employment outlook

The addition of 187,000 jobs in August speaks to persistent strength in the labor market, even as the pace of hiring continues to cool from the accelerated levels of 271,000 over the prior 12 months.

The uptick in unemployment may not be the most welcome news for those seeking jobs or monitoring the labor market. However, the labor force participation rate – the percentage of people who are either employed or seeking a job – rose 0.2 percentage points in August after remaining flat over the prior two months. At 62.8%, labor force participation has reached its highest level since the sharp declines witnessed at the onset of the pandemic.

In addition to the previously mentioned trucking shutdown, the ongoing strikes by actors and writers in Hollywood may have dampened jobs growth in August.