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Fed Faces Pressure to Hike Rates Amid Persistent Inflation
· Confirmed
In Short: The US Federal Reserve faces pressure to raise interest rates this month due to persistent inflation and a strong jobs market.
The US Federal Reserve is under pressure to raise interest rates this month as inflation remains above target and the jobs market remains strong. The Fed has held rates steady between 3.5% and 3.75% for five meetings in a row, but with inflation at 3.4%, many on Wall Street are betting on a rate hike.
Citing the ongoing Middle East conflict and warning that inflation is 'set to remain well above' its 2% target for some time, the European Central Bank raised interest rates this week to 2.5%. This move comes as the ECB grapples with persistent inflationary pressures from the war.
The Bank of England also raised interest rates on Thursday to protect its credibility and address the risk of inflation spiraling out of control. The Bank of Japan, meanwhile, raised interest rates to a more than 30-year high, citing inflation fueled by surging energy prices and a weak yen.
Supertanker rates on the Baltic Exchange's benchmark Middle East-to-China shipping route have surged to a staggering $800,000 a day, adding another layer of inflation pressure for global central banks. Morgan Stanley analysts predict that two-year leasing rates could surge another 20% to 30%.
Barclays recently removed its 4.75% two-year fixed rate and 4.93% five-year deal for new customers, leaving its best rates above the 5% threshold. This move comes as property market activity shows signs of weakening, with inflation currently running at 3.1%.
European Central Bank Governing Council member Emmanuel Moulin said during the European trading session on Thursday that high inflationary pressures in the Eurozone are 100% driven by energy shocks. This underscores the significant impact of energy prices on inflation.
The US central bank has voted to hold interest rates steady again, as a spike in oil prices since the start of the US-Israel war with Iran raises economic uncertainty and threatens to drive up inflation. However, forecasts released after the meeting show a majority of Fed board members still expect to cut interest rates at least once this year.
Treasury yields rose on Tuesday, with the benchmark 10-year Treasury note yield hitting its highest level since July 2007 as investors brace for what may be the first in a series of rate hikes from the Federal Reserve.
Financial markets are pricing in a quarter-point rise as policymakers attempt to prevent another prolonged period of high inflation. The pressure on the Bank’s Monetary Policy Committee (MPC) has intensified after annual consumer price inflation climbed to 3.5% in September.
Investors are weighing persistent inflation, employment conditions, and the Fed's policy outlook. The MSCI Asia Pacific Index fell 1.3%, with Japan’s Nikkei 225 Stock Average sinking 2.2%, as investors awaited key US inflation data on Friday that may determine whether the US Federal Reserve raises interest rates this September.
What this adds
The US Federal Reserve has held rates steady between 3.5% and 3.75% for five meetings in a row, according to the BBC. The European Central Bank raised its three key interest rates by 25 basis points on Sept. 10, citing persistent inflationary pressures from the war, as reported by News.
Background
The US Federal Reserve is under pressure to raise interest rates this month due to persistent inflation and a strong jobs market.
What's confirmed
- The US Federal Reserve is under pressure to raise interest rates this month as inflation remains above target and the jobs market remains strong. The Fed has held rates steady between 3.5% and 3.75% for five meetings in a row, but with inflation at 3.4%, many on Wall Street are betting on a rate hike.
- Citing the ongoing Middle East conflict and warning that inflation is 'set to remain well above' its 2% target for some time, the European Central Bank raised interest rates this week to 2.5%. This move comes as the ECB grapples with persistent inflationary pressures from the war.
- The Bank of England also raised interest rates on Thursday to protect its credibility and address the risk of inflation spiraling out of control. The Bank of Japan, meanwhile, raised interest rates to a more than 30-year high, citing inflation fueled by surging energy prices and a weak yen.
- Supertanker rates on the Baltic Exchange's benchmark Middle East-to-China shipping route have surged to a staggering $800,000 a day, adding another layer of inflation pressure for global central banks. Morgan Stanley analysts predict that two-year leasing rates could surge another 20% to 30%.
- Barclays recently removed its 4.75% two-year fixed rate and 4.93% five-year deal for new customers, leaving its best rates above the 5% threshold. This move comes as property market activity shows signs of weakening, with inflation currently running at 3.1%.
- European Central Bank Governing Council member Emmanuel Moulin said during the European trading session on Thursday that high inflationary pressures in the Eurozone are 100% driven by energy shocks. This underscores the significant impact of energy prices on inflation.
- The US central bank has voted to hold interest rates steady again, as a spike in oil prices since the start of the US-Israel war with Iran raises economic uncertainty and threatens to drive up inflation. However, forecasts released after the meeting show a majority of Fed board members still expect to cut interest rates at least once this year.
- Treasury yields rose on Tuesday, with the benchmark 10-year Treasury note yield hitting its highest level since July 2007 as investors brace for what may be the first in a series of rate hikes from the Federal Reserve.
- Financial markets are pricing in a quarter-point rise as policymakers attempt to prevent another prolonged period of high inflation. The pressure on the Bank’s Monetary Policy Committee (MPC) has intensified after annual consumer price inflation climbed to 3.5% in September.
- Investors are weighing persistent inflation, employment conditions, and the Fed's policy outlook. The MSCI Asia Pacific Index fell 1.3%, with Japan’s Nikkei 225 Stock Average sinking 2.2%, as investors awaited key US inflation data on Friday that may determine whether the US Federal Reserve raises interest rates this September.
What's still developing
- Newly-appointed Fed Chair Kevin Warsh has remained tight-lipped on where he sees interest rates going, but his repeated comments that the central bank's focus should be on slowing price rises has further fuelled expectations of an increase.
- Views differ somewhat, with Grace Zwemmer, US economist at Oxford Economics, expecting rates to remain unchanged, but almost universally a rate cut appears to be off the table.
- DBS Group Research expects India’s inflation to accelerate to 4.9% year-on-year, with food and energy costs driving a gradual broadening of price pressures.
- On a monthly basis, however, core inflation was higher than expected, rising 0.3% from July, rather than the anticipated 0.2%.
- Higher rates would push up borrowing costs across all kinds of loans throughout the economy.
- The cost of servicing that debt comes as the government is under pressure to spend more on defence and cost-of-living support to households, said Martin Beck, chief economist at WPI Strategy.
- An unexpected surge in government borrowing in August, driven by persistently higher inflation, has added to pressure on Chancellor John Healey as he prepares to deliver his first Budget at the end of October.
- Core inflation fell to 1.7 percent in August from 1.8 percent but remains close to the BoJ's two percent target.
- The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%.
- Market expectations for a larger rate increase also began to emerge following the inflation report, with traders assigning roughly a 10% probability to a 50-basis-point hike in December, according to CME Group interest-rate futures.
- Although the increase slowed from September's 0.6%, the latest reading added to concerns that inflationary pressures remain persistent.
- But the composition of the inflation increase is becoming more important for the ECB than the headline number alone.