Author: Fan Zhijing

　　In a speech at the Brookings Institution on Wednesday local time, Federal Reserve Chairman Jerome Powell said that the December policy meeting may slow down the pace of interest rate hikes, but reiterated that restoring price stability is still a long way off.

Affected by this, U.S. stocks rose sharply in the intraday session. The yields of 2-year and 10-year U.S. bonds plummeted by more than 10 basis points. The U.S. dollar index fell by more than 1.3% from its intraday high and fell below the 106 mark.

Interest rate futures show that the probability of the Fed raising interest rates by 50 basis points in two weeks has further increased.

　　Powell: Slow rate hikes likely in December

　　Important topics such as monetary policy, inflation and the economy were covered in the latest speech by the chairman of the Federal Reserve.

　　On the policy path, Powell said that the earliest time to slow down the pace of interest rate hikes may be at the December meeting.

"It makes sense to slow down the pace of rate hikes as we get closer to a level of policy interest rates that are high enough to reduce inflation."

　　In September this year, the Federal Reserve predicted that the monetary policy interest rate target would be 4.6% by the end of next year. Powell pointed out that the final interest rate of the interest rate hike cycle will be slightly higher than this level, and there are uncertainties in the specific position and duration.

　　He tried to avoid any discussion of rate cuts, saying that curbing inflation requires keeping rates at restrictive levels for a period of time and that policy moves such as raising rates and shrinking balance sheets usually take time to show results.

“We are a long way from restoring price stability. History has strongly warned against easing policy too soon. We will stay the course until the job is done.”

　　CME Group's CME interest rate monitoring tool FedWatch shows that the probability of the Fed raising interest rates by 50 basis points in December is 76%, an increase of 7 percentage points from Tuesday.

The peak of this round of interest rate hikes may appear in June next year, with a median rate of 4.94%, down 10 basis points from the peak two weeks ago.

　　When it comes to inflation, Powell pointed out that core inflation will hover around 5% throughout 2022. "Despite policy tightening over the past year, we have not seen significant progress in slowing inflation." evidence that inflation is actually falling."

　　Powell dismantled inflation into three parts: core commodity inflation, housing service inflation, and core service inflation other than housing.

First, prices of core commodities will begin to exert downward pressure on headline inflation in the coming months; second, housing rental inflation has been falling since the middle of the year, and as long as rental inflation continues to decline, the housing price index is expected to decline, he said. A decline begins sometime next year; finally, wages are growing well above the Fed's 2% inflation target.

The labor market is showing only tentative signs of rebalancing.

“Strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2% inflation. We are looking for signs of a return to the balance between supply and demand in the labor market,” he said.

　　The Fed has paid attention to the pressure on the economy. Recently, the manufacturing PMI in many places in the United States has further fallen into a shrinking range, and the labor market has also shown signs of loosening.

Powell said growth in economic activity had slowed and was well below its long-term trend.

He doesn't want to tighten policy too much and believes the economy can avoid a deep recession.

"I still believe there is a path to a soft landing, and I think that's very plausible. A loose definition of a soft landing is that unemployment rises, but it doesn't really spike like it does in some recessions."

　　Challenging economic outlook

　　After raising interest rates by 75 basis points four times in a row, the Federal Reserve first released a signal to slow down interest rate hikes at its November meeting, and the committee began to pay attention to the lagging effect of monetary policy.

However, high inflation has divided views on the path of policy among Fed officials in their latest speeches.

　　Bob Schwartz, senior economist at Oxford Economics, said in an interview with China Business News that the Fed is still waiting for more substantive signals of cooling inflation.

Many officials are more worried about easing the brakes too soon than raising rates too high to curb inflation.

He analyzed that service prices are the main driver of inflation at this stage, are more resistant to economic slowdown, and service prices are more closely linked to labor costs.

While the job market has cooled, it remains hot overall, which in turn could send a signal to the Fed that more rate hikes are needed to cool demand.

　　The Federal Reserve's latest Beige Book on economic conditions shows that high inflation and interest rate hikes have heightened economic uncertainty.

Today, the sustainability of American household consumption demand is facing a test.

U.S. consumer sentiment deteriorated in November amid concerns about high inflation and an impending recession.

Americans' inflation expectations edged up in November, according to a University of Michigan survey.

Next year, consumers expect prices to rise 5.1 percent, up from a 5 percent forecast in October.

Inflation expectations for the next five years, which Fed officials closely watch, accelerated to 3 percent from 2.9 percent last month.

　　The perception of retailers shows the seriousness of the situation.

Target Chief Financial Officer Michael Fiddelke said recently that consumers, pressured by inflation and high interest rates and increasingly price-sensitive, are focusing discretionary spending on discounted items .

Barbara Rentler, chief executive of discount retailer Ross, expects continued inflation headwinds to weigh on low- and middle-income customers.

According to data released by Costco after the market closed on Wednesday, sales growth fell to 5.7% in November, and e-commerce sales fell by double digits.

　　Schwartz believes that high inflation means that the policy is expected to be further tightened. It is expected that the Fed will raise interest rates by 50 basis points in December and continue to raise interest rates by 25 basis points in February next year, and then it may pause the tightening cycle to observe the policy impact.

He noticed that, as an important recession warning indicator, the 2/10-year Treasury yield curve is steeper than before the previous four recessions, and the risk is growing.

Schwartz predicted that in the first half of next year, the US GDP will experience two quarters of negative growth and fall into a small recession.

　　Deutsche Bank believes that the Federal Reserve is "close to fulfilling" its mission to curb inflation, but a moderate economic recession will be the price Americans have to pay for price stability.

　　Michael Gapen, chief U.S. economist at Bank of America, took a similar view, saying the worst is over for rising prices and that a modest economic contraction is likely to follow.

"As supply chain disruptions ease further. The decline in inflation will be accompanied by a cooling economy, which means that the labor market is expected to soften and the unemployment rate will peak at 5.5% next year. The mild recession in the United States is driven by weaker investment and consumer spending. promoted," he wrote in the report.

　　Goldman Sachs is one of the few institutions that thinks the U.S. can avoid a recession.

In its 2023 outlook report, the bank pointed out that the U.S. economic growth may slow to around 1%. As the surge in job opportunities fades, the unemployment rate is expected to rise modestly by 0.5 percentage points. The decline in savings rate and the increase in credit can support interest rates consumer spending.