Economic Pathway - August 2023 By CareEdge Ratings
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US: Present Hiking Cycle the Fastest, but Liquidity Remains Comfortable
• Current rate hiking cycle had the fastest pace of policy tightening and the highest quantum of the rate hike since the 1990s.
• However, Quantitative Tightening (QT) has not been very aggressive, with the Federal Reserve balance sheet down~USD 757 bn from its peak.
• Even though the cost of money has risen, comfortable liquidity conditions continue to support the US economy.
• The market anticipates at most one or no Fed rate hike going ahead.
Inflation Threat in the US Reduces
• US CPI inflation rose 3.2% y-o-y in July below market expectations of 3.3%, while core CPI eased to 4.7% in July.
• Fed’s preferred inflation gauge i.e. PCE eased to 3% y-o-y in June, the lowest in over two years.
• July FOMC minutes however highlighted that participants remained wary about upside risks to inflation, leaving the door open for more rate increases
US Labour Market Cools
• Nonfarm payrolls (NFP) rose by 187K in July, lower than the average monthly gain of 312K over the prior 12 months.
• Notably, NFP gains have been revised lower in every month of 2023. Cumulative revisions represent a loss of 245K jobs.
• Unemployment rate, however, inched lower to 3.5% in July, from 3.6% in June.
• With growth holding up well, and inflation and the labour market showing signs of cooling, rate action at the September FOMC meeting would be a close call
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