US Fed Chair Jerome Powell will be delivering a key policy address on Thursday, October 19, where he would be tasked with convincing the markets that the US Fed is committed to fighting inflation. He will speak to the Economic Club of New York at noon ET.

With the next US Federal Reserve meeting scheduled from October 31 to November 1, investors and analysts are eagerly awaiting crucial insights into the central bank's stance on monetary policy. Federal Reserve Chair Jerome Powell's recent remarks have underscored the need for a persistent restrictive policy, signaling cautious optimism amid signs of easing inflation.

The September jobs report released last week delivered a surprise, revealing the addition of 336,000 jobs, nearly double the anticipated figure. The unemployment rate held steady at 3.8%. This robust performance has prompted traders to adjust their expectations, with increased bets on an interest rate hike by the year's end.

Despite the labour market's 33rd consecutive month of growth and an unemployment rate remaining below 4%, concerns loom about the economy's resilience.

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Inflation, as measured by the consumer price index, has moderated to approximately 3.7% from last year's 9%, influenced by the Fed's proactive approach with a series of interest rate increases over the past 18 months.

The Fed, tasked with maintaining 2% inflation, faces a delicate balancing act. They must determine the optimal number of rate hikes to curb inflation while deciding how long to uphold firm borrowing costs.

US treasury yields have spiked up close to their 230-year average for the first time since 2007, a Reuters report noted quoting Deutsche Bank data. This highlights the challenge of adjusting to higher rates. Bond yields determine the funding costs of governments. So the longer the yields remain high, the more the interest burden.

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“The Fed needs to recognise that the incredible increase in the bond yield is already a form of tightening. The bond markets doing a lot of the work for the Fed from here on; I mean, 10-year bond yield is close to 5% is quite a disaster for commercial real estate. So, we have had this rolling recession that is now rolling through commercial real estate, and I do not think the Fed needs to do anymore,” Ed Yardeni, President of Yardeni Research told CNBC-TV18.

At the last policy in September, the US central bank kept the policy rates steady. As per the Fed’s projections released in September, rates are likely to be hiked to a median of 5.6% by the end of 2023, slightly higher than the current range. The current range between 5.25% and 5.5% is the highest in nearly 22 years.

There are two more policy meetings left in the year. The rate-setting Federal Open Market Committee expects two rate cuts in 2024, taking the rate to around 5.1%.

“The Fed has to recognise that the economy is still very resilient, they don't want to push this thing too far. I mean, if wage inflation is coming down, and if we get a decent consumer price index (CPI), the expectation is 0.3% - couldn’t be lower if the rent inflation finally comes down. I think inflation is coming down without a recession, if that is the case then I don't think the Fed should not push this thing too far,” Yardeni said.

As the Fed officials gather for the October-November meeting, they confront the challenge of interpreting mixed signals from the job market and the broader economic landscape. The strong jobs data alone might not drive another rate increase this year. The Fed will also watch other incoming data including an inflation report to be released on October 12.

“The message from the Fed, when they last spoke, was it's going to be data dependent. Data has not worsened, but it's not improved in terms of a significant slowdown in the economy, which would be considered an improvement that the economic action slowing down. So, the Fed, on the margin, will still be looking at data,” Sandeep Bhatia, Head-Equity and Country Head-India, Macquarie Group told CNBC-TV18 in a recent interview.

“I don't think the Fed increase cycle has completely gone away. Even if it doesn't happen in the upcoming meet, it can happen in the first quarter of next year,” he said.

The upcoming meeting will be a pivotal moment, offering valuable insights into the Fed's strategy for sustaining economic growth and managing inflation pressures.

(Edited by : Shweta Mungre)

First Published:Oct 9, 2023 10:01 PM IST