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Federal Reserve policymakers have telegraphed they will not raise US short-term borrowing costs again this week, but with inflation concerns still front and centre, investors believe a rate-hike pause will not last for long.
Inflation picked up last month and broadened well beyond rising fuel prices, and US economic growth accelerated last quarter, government reports are expected to show, with gains powered by solid consumer spending and surging business investment driven by demand for AI.
Meanwhile the labour market has been stable: The unemployment rate was 4.2 per cent last month and weekly unemployment insurance claims are running lower than at any point in Fed Chairman Kevin Warsh’s lifetime.
Indeed, analysts say, were it not for a sharp rise in US Treasury yields in the weeks following the Fed’s September rate hike, a second straight increase this week would have been in the cards.
“The data, in my opinion, do support a rate hike,” said Nationwide Chief Economist Kathy Bostjancic, noting that data since the Fed’s last meeting showed ‘a strong economy, a strong consumer and labour market, and inflation ... deteriorated, it went the wrong way.’
Fed policymakers were ‘spooked’ by a rise in US 10-year Treasury yields to near-quarter-century highs that threatened to slow the economy more than they had intended, she said. The run-up prompted a number of them, including influential officials such as New York Fed President John Williams and Fed Vice Chair Philip Jefferson, to signal the Fed is content to wait for more data before deciding what to do.
Financial markets responded by slashing bets on a rate hike. As of Friday, rate futures were pricing a 90pc chance of a hold at the Fed’s October 27-28 meeting.
Bond yields eased late last week amid a stock rout triggered by worries over the sustainability of AI demand, complicating the picture for Warsh who has at times pointed to tighter financial conditions.
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