The acceleration of the expansion of the US service industry has sounded the alarm. Is it not easy for the Fed to "press the brakes" on interest rate hikes?

　　As the Federal Reserve enters the silent period before the interest rate meeting, economic data has once again become the trigger for disturbing market sentiment.

　　The latest indicator of U.S. services sector expansion unexpectedly accelerated, showing that economic momentum has not been severely impacted.

Investors worry that the Fed's interest rate hike expectations may further exacerbate economic risks.

As an important forward-looking indicator of recession, the inversion of 2/10-year U.S. bond yields has further expanded.

U.S. business dynamism remains strong

　　The ISM non-manufacturing PMI of the US Institute of Supply rebounded from a nearly two-year low to 56.5 in November. The tone of comments collected from companies was positive, including "business has expanded" and "demand for services is increasing."

Similar to the non-agricultural data, the ISM service industry employment index increased to 51.5 from 49.1 in October, reflecting that labor demand is still strong.

　　As a barometer of business conditions in U.S. service industries such as banks and restaurants, it was a strong indication that the economy is still expanding steadily.

Although the U.S. manufacturing industry has continued to weaken recently, the healthy growth of consumer spending and the continued tightness of the labor market have become the biggest guarantee of economic resilience, which has also exacerbated the uncertainty of the subsequent price drop.

　　A pick-up in U.S. services sector activity, coupled with a better-than-expected non-farm payrolls report last week, provided more evidence of the economy's underlying momentum, with investors worried that the Federal Reserve's future monetary policy path could tip the economy into recession.

Boris Schlossberg, a macro strategist at BK Asset Management, an asset management agency, said in an interview with China Business News that the Fed has not received more information needed to control inflation, which increases future policy pressure.

　　He told reporters that what needs to be seen for the FOMC is a faster cooling in the labor market, however the acceleration in services sector activity confirms that the inflation booster will be shifted further to this sector, and that part of the price Stress tends to take longer to ease, so interest rate risk will be skewed higher.

He expects the tests facing the U.S. economy to intensify in the first half of next year as monetary policy and financial conditions continue to tighten.

　　In response to price risks, the Federal Reserve has raised interest rates by 375 basis points this year, the most aggressive tightening since the 1980s.

The strong data exacerbated the risk that the Fed will push its target for a rate-hike cycle higher and keep rates higher for longer.

Yields on medium and long-term U.S. bonds rose across the board on Monday, and the 2-year U.S. bond, which is closely related to interest rate expectations, returned to the 4.40% mark.

　　"While the data is good news for the growth outlook, it's not too good for the Fed's attempt to curb demand and ease inflation," said Priscilla Thiagamoorthy, an economist at BMO Capital Markets.

The Fed's dilemma

　　The Fed is less than two weeks away from its last interest rate meeting of the year.

Judging from previous official statements, the aggressive stance that started in June is coming to an end, and the rate hike in December is expected to drop to 50 basis points.

However, the goal of achieving long-term inflation has not changed. Many members, including Powell, believe that the final interest rate of the interest rate hike cycle will be slightly higher than the 4.6% level predicted in September, and will last longer in the restrictive area.

　　In fact, within the Federal Reserve, there is generally a cautious view on policy shifting ahead of schedule.

New York Fed President John Williams and St. Louis Fed President James Bullard said last week that a rate cut may not come until after 2024.

Powell also tried to avoid any discussion of rate cuts, saying there was a long way to go to restore price stability and that history strongly warned against premature easing.

　　Foreign media analysis reported that the Federal Reserve will discuss the rate hike plan for next year while slowing down the rate hike to 50 basis points this month.

Rapid wage growth could lead Fed officials to consider raising the policy rate above 5% in 2023.

This means that due to rising wage pressures, the Fed may raise the terminal interest rate for this round of rate hikes to a level higher than current market expectations.

　　Affected by this, the inversion of the U.S. 2/10-year Treasury yield curve on the first trading day of this week was the largest since 1981, reaching 81.8 basis points.

Such concerns are not unfounded.

Bank of America recently released a research report showing that the Fed has never in history managed to avoid a recession while dealing with such high levels of inflation.

　　Schlossberg told China Business News that Wall Street's concerns about recession are escalating. "From the Fed's Beige Book, we can see that there is greater uncertainty or pessimism about the outlook. The Fed's dilemma has also exacerbated potential risks. In terms of controlling inflation and avoiding a hard landing, the difficulty of achieving the goal is enormous."

　　It is worth noting that many funds believe that economic risks will force the Fed to start cutting interest rates.

CME Group (CME) interest rate monitoring tool (Fed Watch) shows that the Fed will raise interest rates to nearly 5% in May next year, and then start to cut interest rates from the third quarter, and the interest rate range will return to 4.25%~4.50 by the end of 2023 % range.

　　But Jefferies economist Aneta Markowska dismissed it, saying: "These expectations are premature. I don't think the Fed will be comfortable until the unemployment rate approaches 5% or inflation falls below 3%. Cut interest rates. These conditions are unlikely to be met before 2024.” According to the plan, the Federal Reserve will simultaneously update the economic outlook (SEP) at next week’s interest rate meeting, and changes in the path of interest rate hikes and economic data forecasts have attracted attention.