Strong Labour Market

Federal Reserve Chairman Jerome Powell expressed a firm stance on inflation, projecting multiple interest rate increases in the near future, potentially at an aggressive pace. Speaking at a monetary policy session in Sintra, Portugal, Powell emphasized the driving force behind this decision, stating, “We believe there’s more restriction coming, [...] What’s really driving it ... is a very strong labor market”. These remarks reinforce the position taken by Powell's fellow policymakers during their June meeting, where they indicated the likelihood of an additional half percentage point increase through the end of 2023.

  • Assuming a quarter point increase per meeting, this would amount to two more hikes. Although Powell had previously suggested the possibility of alternate meetings for rate rises, he acknowledged on Wednesday that the data could influence a different approach.
  • Since March 2022, the Fed has implemented rate hikes at every meeting, including four consecutive three-quarter point moves, before pausing in June.

When asked about the possibility of consecutive meetings for rate adjustments, Powell stated, “I wouldn’t take, you know, moving at consecutive meetings off the table”.

Impact Remains To Be Seen

A key aspect of the Fed's current thinking is the belief that the ten consecutive rate hikes have not yet fully impacted the economy. Consequently, policymakers remain uncertain whether their measures meet the standard of being "sufficiently restrictive" to bring inflation down to the Fed's 2% target.

Most economists anticipate that the rate increases will eventually push the United States into a shallow recession. Powell acknowledged this possibility, stating, “There’s a significant possibility that there will be a downturn,” while also noting it is not the most likely scenario.

  • Addressing concerns about banking stresses, Powell acknowledged that the issues in March, which led to the closure of Silicon Valley Bank and two other institutions, did factor into the Fed's considerations at the last meeting.
  • While Powell has consistently highlighted the overall stability of the U.S. banking industry, he emphasized the need for caution, recognizing the potential for credit availability issues. Recent surveys have indicated a general tightening of standards and a decline in loan demand.

Global Rate Hikes

During the forum, Powell's fellow central bankers also emphasized the importance of controlling inflation. European Central Bank President Christine Lagarde stated that it still has ground to cover and expressed the likelihood of another hike in July. Bank of Japan Governor Kazuo Ueda indicated a possible tightening of ultra-loose policies if inflation persists, while Bank of England Governor Andrew Bailey stressed the significance of price reduction and dismissed the idea of raising the 2% inflation target.

Powell acknowledged the persistence of inflation, stating, “It’s going to take some time. Inflation has proven to be more persistent than we expected and not less [...] Of course, if that day comes when that turns around, that’ll be great. But we don’t expect that.”

Benchmark's Take

Based on the current inflation readings and customer sentiment, it appears that the recent price increases are beginning to have an impact. However, central banks are not done yet, and discussions about raising interest rates will likely continue, possibly leading to rates reaching around 6%.

  • Nevertheless, we anticipate that the rate hikes will gradually slow down, providing some relief for the stock market. This development is expected to have a positive effect on the valuation of long duration assets, particularly technology stocks.
  • Consequently, we hold a bullish outlook on technology stocks as a whole and anticipate that this sector will be a key driver of market performance in the upcoming months.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Credits

Photo by Dmitry Demidko / Unsplash.