Currency Insight - Fed Likely to deliver a `Hawkish Pause` by Motilal Oswal Financial Services ltd
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Fed likely to deliver a “Hawkish Pause”
In last couple of years, inflation has been the key measure to evaluate central bank action and focus on growth has taken a back seat. Inflation has retraced in last few months after hitting the highest in September 2022, but the question remains that will inflation recede further or will it turn around and continue to move higher?
Will focus shift to growth from inflation this time around?
In the upcoming meeting market participants have discounted that the central bank is expected to take a pause and is going to be narrative of the Fed governor that will drive a move in currencies, commodities and US treasuries. Before we answer all these questions, let us look at how is the overall state of US economy and what should we expect from today’s Fed meeting.
Moving towards ‘Soft-Landing’
The U.S. economy has remained solid despite the Federal Reserve’s aggressive tightening in the last one and half year. Higher borrowing cost could lead to a situation like ‘hard-landing’; which currently looks out of sight as economic numbers have been beating estimates. Demand across the US economy remains firm and that remains one of the key reason to dodge a recession. Retail sales number in the last few months also suggest that there has been sustained recovery. Unfortunately, recent economic data is showing warning signs that higher interest rates may finally be starting to take a toll on the labor market. Latest jobs data reported that unemployment rate ticked up in August, while adding 187k jobs in August, thereby marking the latest evidence that the economy still remains resilient. On the other hand, growth in consumer spending and other signs of economic resilience suggest that the Fed might have to restrict further money supply to bring back inflation to central bank’s target of 2%. Over the last oneyear, interest rates across board has been on a rise and market participants are waiting for more signs to get clarity on whether we are moving towards a ‘Long-pause’ before Fed decides to cut rates. It is not only the Fed but also other major central banks whose focus has been to bring down inflation without sending the economy into recession i.e. Soft-Landing.
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