The Wall Street Journal (WSJ) reported on the 5th (local time) that the US central bank, the Federal Reserve System (Fed), is likely to raise interest rates more aggressively than expected next year due to overheating of the labor market.
Overall, inflation is peaking and showing signs of slowing, but the WSJ's diagnosis is that wage pressures remain and it could continue to raise rates higher than investors currently expect.
The fact that the US employment index last month, released on the 2nd, far exceeded the market forecast, reinforces this observation.
Nonfarm job growth in November exceeded expectations by more than 30%, and average hourly wages soared 0.6% (month-on-month), doubling the forecast, further worrying the Fed.
This rise in wages and high inflation in labor-intensive service industries could push the Fed's final rate higher than the 5% currently expected by investors, the newspaper predicted.
This is because as wages continue to rise, the risk of prolonged inflation increases.
At the regular meeting of the Federal Open Market Committee (FOMC) in December, which will be held on the 13th and 14th, a 0.5 percentage point rate hike is certain, and if the November consumer price index (CPI) scheduled to be announced on the 13th is high, the Fed will The WSJ pointed out that in February, it is possible to take a consecutive big step (a rate hike of 0.5 percentage points at a time).
According to the WSJ, the Fed is expected to slightly raise its base rate forecast for next year from 4.5-5% to 4.75-5.25% in the dot plot (a chart showing the interest rate forecasts of FOMC members) to be released after the FOMC meeting in December.
Next, a fierce debate is expected to take place between hawkish members (preferring monetary tightening) who insist on a 0.5 percentage point rate hike in February next year, and dovish members (preferring monetary easing), who prefer 0.25 percentage point.
Even if overall inflation slows, if the labor market continues to overheat, hawks who believe that underlying inflationary pressures will remain may weigh on the view.
In this regard, the Fed's head, Jerome Powell, in a recent Brookings Institute speech, raised interest rates quickly to the level of 5% or more, and then switched to cutting rates immediately when inflation was confirmed, or raised interest rates slowly and carefully explored the appropriate level, then raised them to higher levels. We have proposed two ways to maintain interest rates at this level for a long period of time.
Powell said he prefers the latter.
At the time, Chairman Powell's speech was interpreted by the market as a "pigeon turn" and triggered a rally in the financial market, but Chairman Powell said to his aides that "failure to contain inflation is a bigger mistake" and that his view did not change. WSJ reported.
(Photo = Yonhap News)