[Asia Economy New York=Special Correspondent Joselgina] "It is still a long way until the end of the base interest rate hike." "It could rise to 4.75%."
Despite warnings from the International Monetary Fund (IMF) that the possibility of a global economic recession has increased due to high inflation and simultaneous interest rate hikes, hawkish messages from the U.S. Federal Reserve (Fed) continue. The Fed has effectively drawn a line against market expectations of an early policy pivot.
◆Flood of Fed Hawkish Remarks
According to major foreign media including The Wall Street Journal (WSJ), Fed Governor Lisa Cook said in a speech at the Peterson Institute for International Economics, a U.S. think tank, on the 6th (local time), "We must maintain restrictive policies until we are confident that inflation has firmly entered the 2% target path." In her first public speech since taking office in May, Governor Cook emphasized, "There may be some pain in lowering inflation," but "it is important to prevent inflation expectations from becoming entrenched." She also supported a 0.75 percentage point rate hike in November.
Neel Kashkari, President of the Minneapolis Federal Reserve Bank, also dismissed market pivot expectations, saying it is still a long way until the rate hike stops. Kashkari, who has been considered a representative dove within the Fed, said, "We will not declare a pause until we see clear evidence that inflation has peaked and is declining," adding, "In my view, we are quite far from that." He explained that there is a significant gap between the recent situation and the halt of rate hikes. In particular, he pointed out that core inflation, including wages and services, remains high and added, "The Fed's mission to stabilize prices is not over. Additional measures are needed."
Charles Evans, President of the Chicago Fed, also pointed out, "Many members are concerned that core inflation is too high." He predicted that the U.S. base interest rate could rise to 4.5-4.75% early next year. Currently, the U.S. base interest rate is 3.0-3.25%. Earlier, the Fed indicated a median rate of 4.4% by the end of this year, meaning rate hikes will continue at least until early next year. Moreover, Fed officials have suggested that even after finishing the rate hike cycle, high rates will be maintained for a considerable period.
◆Tightening Strengthened Despite IMF Warning and Weak Employment Data
These hawkish remarks stand out amid rising uncertainty in global financial markets and stronger recession signals. The employment data released that day was weak. Weekly jobless claims exceeded market expectations at 219,000, the highest since the end of August. The September layoff plans disclosed by Challenger, Gray & Christmas (CG&C) also increased by 46.4% month-on-month to 29,989. These are generally considered signs of a cooling labor market and factors supporting market expectations of a Fed pivot to slow tightening.
The IMF also issued a warning that the risk of recession has increased. Kristalina Georgieva, Managing Director of the IMF, expressed concern in a speech at Georgetown University that global recession risks have increased due to inflation, interest rate hikes, and ongoing supply chain disruptions. She also announced that the IMF will revise down next year’s global economic growth forecast from the existing 2.9%. The IMF expects that countries accounting for one-third of the global economy will experience at least two consecutive quarters of contraction either this year or next.
However, amid this, Fed officials continue to repeat their existing message that some pain, including economic slowdown, will be tolerated to stabilize prices.
The market is currently awaiting the employment report to be released the next day. The key issue is wage increases, which could raise inflationary pressures. Experts point to wage hikes and housing costs as factors that could prolong inflation. If strong upward pressure is maintained, the Fed’s high-intensity tightening is expected to gain further momentum. On the 13th, the September Consumer Price Index (CPI) will also be released. Wall Street expects an 8.1% increase year-on-year. There are also forecasts that the core CPI, excluding volatile food and energy, will rise 6.5% year-on-year, exceeding last month’s increase.
Kristalina Georgieva, who warned of a recession, also emphasized that central banks including the Fed must continue firm tightening. She said, "Inflation is still high," and added, "Fiscal policy should not step on the accelerator while monetary policy is applying the brakes. This would create a very difficult and dangerous situation."
According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market currently reflects more than a 76% chance of a 0.75 percentage point rate hike in November. This is higher than 53% a week ago and 65% the day before.
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