Fed Looking at Slowing Rate Hikes
As inflation keeps running hot, the Federal Reserve approved a fourth-straight rate hike of 0.75% on Wednesday, bringing the bank’s benchmark lending rate from near zero to 4% in eight months and the highest it has been since 2008. This increase brings added pressure to thousands of businesses and families as their cost of borrowing goes up.
The Fed Chair, Jerome Powell, addressed many concerns around the rate hikes in the press conference that followed, where he seemed to have a more hawkish stance. It does not look like we will be seeing the Feds pause the rate hikes as Chair Powell mentioned that any talk of a rate hike at this stage is “very premature,” but he did acknowledge that the pace at which they increase the rates may slow in the coming months, as they see higher risk in pausing rates prematurely than in overtightening because by pausing the rate hikes now, inflation could runaway and cause more significant damage to the economy compared to overtightening, where the Feds could address it with rate cuts.
During the press conference, Chair Powell also spoke about how the recent data indicates that the peak interest rate will be higher than what was outlined by the Feds in their September meeting, where they outlined the peak rate to be 4.6% in 2023. There is a higher possibility now that we can expect the peak rate closer to the market expectations of 5.0% to 5.3% in the first half of 2023.
Historically, the stock market has had a positive run during the periods right after the last rate hike. On average, the S&P 500 was up 15% during the 12 months after a series of rate hikes. We can expect some volatility as we go through the last few cycles of rate hikes, but if history repeats itself, this could be an opportunity to develop strategies that makes the most out of the market and help meet your financial goals.
A Resilient Labor Market
Job growth in the US rose unexpectedly in October, beating expectations of a slowdown within the labor market amidst inflationary concerns and rising interest rates. There were 261,000 new jobs that were added last month, against the forecasted 200,000. The report released by The Department of Labor also showed that wages continue to increase, although last month’s increase was the slowest pace at which the wages have increased in over a year. Healthcare and Professional and technical services added the most jobs last month by adding 53,000 and 43,000, respectively.
The data also showed an increase in the unemployment rate last month as it increased to 3.7%, which might have offered some ease to the Feds as they try tackling inflation by restraining economic growth because the worker shortages have led to employers increasing wages to attract talent, which in turn increases economic activity and inflation. The average hourly salary was up 0.4% in October, while wages have increased 4.7% from October 2021.
This year’s average growth in jobs is 407,000 per month, while there was an average of 562,000 jobs per month in 2021. Even then, the labor market remains tight, with about 1.9 jobs open for every unemployed person.
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|Dow Jones Industrial||32,861.80||32,403.22||-1.40%|
● The S&P 500 fell more than 3%, and the NASDAQ fell nearly 6%, losing its positive momentum from the past two weeks
● Minus the energy sector’s 139% jump in earnings, companies across the S&P 500 would be reporting a year-over-year decline in profits of around 5% this earning season
● Reversing from the previous week’s decline, the yields of U.S. government bonds rose, making last week the 13th week of rising yields out of the past 14
The Consumer Price Index (CPI) report for October will be released on Thursday, and it will help investors understand if inflation continues to be elevated or if there will be a cooldown in the rate of inflation as higher interest rates work their way through the economy.