As the world watches the US Federal Reserve's moves with bated breath, Robert Sockin, Global Economist at Citi, believes that the US Fed is likely to hit the pause button in its next meeting. This expectation aligns with the Fed's aim to strike a balanced tone in its communication, reflecting its cautious approach toward the current economic landscape.

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Sockin said, “We think they are likely to pause at their next meeting. I think at Jackson Hole, Federal Reserve Chairman Jerome Powell is going to strike a balanced tone where he is going to emphasise that they are data dependant and it is uncertain how far they are going to have to go. But wherever they stopped, their rates are likely going to stay high for a longer period of time.”

Foreseeing the future, Sockin predicts another rate hike by the Fed in November. “Given that we think it's going to take a while for that services inflation to come down in the US economy, we are seeing a lot of improvement on the good side, I think that's likely to continue.”

Sockin hints at the possibility of the Fed raising rates even further if inflation remains persistent and economic activity retains its robustness.

Read Here | Wall Street, yields tread water as investors await Fed at Jackson Hole

The US dollar is the reserve currency and hence the US 10-year yield is going to be the default interest rate of the world. The rise in the US yields from 3.5 percent in June to 3.75 percent in July to 4.3 percent in August is impacting macros of all countries because this is the default rate of the world.

Sockin enumerates several factors contributing to the surge in yields. Foremost among these is the resilient state of the US economy. Sockin highlights a range of data, including robust labour market indicators, strong retail sales figures, and a thriving housing market.

“So it's this ongoing resilience that I think is convincing markets, that not only is the economy performing better than expected with these with these rate hikes but that might mean that any expectations for rate cuts have to get pushed out further into the future. And it may also be that beyond that rates have to stay higher for longer, and that inflation will stay higher for longer as well. So I think it's a combination of the macro, first and foremost, that's been driving this move up in yields.”

Steven Englander, Global Head of G10 FX Research at Standard Chartered, suggests that there could be a potential downward pull on US yields.

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(Edited by : C H Unnikrishnan)

First Published:Aug 21, 2023 3:05 PM IST