Investors looking for clues about what the Federal Reserve will decide during its December policy meeting got quite a few this week. But those hints about the future of monetary policy point to an outcome they will not be happy with.
What is happening: Federal Reserve officials have delivered a series of speeches this week indicating that aggressive rate hikes to fight inflation will continue, dashing investors’ hopes of an upcoming shift in central bank policy. On Thursday, St. Louis Federal Reserve President James Bullard said the central bank still has a lot of work to do before it brings inflation under control, sending the S&P 500 down more than 1% in early trade. It later cut losses.
Bullard, a voting member of the Federal Open Market Committee (FOMC), said the moves the Fed has taken so far to fight inflation have not been enough. “To get to a sufficiently restrictive level, the interest rate needs to increase further,” he said.
The comments come a day after Kansas City Fed Chair Esther George, who is a voting member of the Federal Open Market Committee, told the Wall Street Journal that she’s “looking at a very tight job market, and I don’t know how she continues to achieve that level.” Inflation is coming down without some real slowdown, and we may have deflation in the economy to get there.”
San Francisco Fed President Mary Daly added Wednesday that a pause in rate hikes is “off the table.”
numbers game: Bullard said Thursday that Fed officials should raise interest rates to between 5% and 7% to curb inflation. These numbers shocked investors, as they require a series of large and economically painful highs that increase the chance of a hard landing.
The current interest rate is between 3.75% and 4% and the average FOMC participant predicted a peak funds rate of 4.5-4.75% in September. If those numbers hold steady, Fed members will raise rates by just another three-quarters of a percentage point.
But Fed Chairman Powell said at the November meeting that expectations are likely to rise in December and if Bullard is correct, that means investors can expect another one to three percentage point increase in rate hikes.
Hub DreamsWeaker-than-expected October consumer and producer price index boosted investors’ hopes that the Federal Reserve may ease its steep interest rate hikes and send markets rallying to their best day since 2020 last week.
But messages from Federal Reserve officials this week brought Wall Street back to the ground.
That’s because market rally helps the economy expand, which is the opposite of what the Fed is trying to do with its tightening policy, said Liz Ann Saunders, managing director and chief investment strategist at Charles Schwab. She said Fed officials may try to do some “unwinding” with hawkish rhetoric in order to lower the markets.
bottom line: Investors are listening closely to Bullard’s comments because he is known to have a looser lip than other Fed officials, Peter Boockvar, chief investment officer at Blakeley Financial Group, wrote in a note Thursday. But his hawkish expectations may have been “overboard,” especially since he won’t be a voting member of the FOMC next year.
Wall Street analysts are still listening. Goldman Sachs raised its forecast for the federal funds rate on Thursday to 5-5.25%, up from 4.75-5%.
A series of high-profile layoffs has rattled major tech companies this month.
Amazon confirmed that layoffs have begun at the company and will continue into the next year, just days after multiple outlets announced that the e-commerce giant planned to lay off about 10,000 employees. Meta, Facebook’s parent company, recently announced 11,000 job cuts, the largest in the company’s history. Twitter also announced extensive job cuts after Elon Musk bought the company for $44 billion.
The series of high-profile layoffs has raised concerns that the labor market is weak and that A.J A recession could be just around the corner.
These concerns are not unjustified: The Fed is actively working to slow economic growth and tighten financial conditions to rebalance a hot labor market. More layoffs in both technology and other industries are likely inevitable as the Federal Reserve continues to raise interest rates.
But this wave of layoffs isn’t as significant as headlines might lead Americans to believe. On Thursday, weekly jobless claims actually fell by 4,000 to 222,000 despite an increase in tech job cuts.
In a note on Thursday, Goldman Sachs analysts identified three reasons why the layoffs may not signal a looming recession in the United States.
First, the technology industry accounts for a small share of total employment in the United States. While IT companies account for 26% of the S&P 500 market capitalization, they account for less than 0.3% of total employment.
Second, tech job opportunities remain much higher than they were before the pandemic, so laid-off tech workers should have good chances of finding new jobs.
Finally, Goldman analysts have found that tech layoffs have risen a lot in the past without a corresponding increase in total layoffs and have not historically been a leading predictor of broader deterioration in the labor market.
They concluded that “the main problem in the labor market remains that demand for labor is too strong, not too weak.”
Mortgage rates fell sharply last week after a series of economic reports suggested inflation might finally be easing, says my colleague Anna Bahni.
17, down from 7.08% in the previous week, according to Freddie Mac, the largest weekly drop since 1981.
But that’s still much higher than it was a year ago when the 30-year fixed interest rate was 3.10%.
“While the decline in mortgage rates is welcome news, the housing market still has a long way to go,” said Sam Khater, chief economist at Freddie Mac. “Inflation has remained high, the Fed is likely to keep interest rates high and consumers will continue to feel the impact.”
Buying a home continues to be a challenge for many homebuyers. Mortgage rates are expected to remain volatile for the rest of the year. And prices remain high in many areas, especially where there is a very limited inventory of homes available for sale.
Meanwhile, inflation and rising interest rates mean that many potential buyers also face tight budgets.