(Author: Pan Yiheng)
Yingwei Financial Investing.com – Recently, as inflation concerns have intensified, interest rates on US short-term debt have soared, and the two-year US bond yield has hit its highest level since the end of June 2020. The latest US CPI data adds another fire to inflation concerns.
Inflation is on the rise again
On Wednesday, the United States announced the September CPI price index.
Data show that in September, the CPI rose 5.4% year-on-year, slightly higher than market expectations of 5.3%, and for the fifth consecutive month it increased by more than 5% year-on-year, the highest level since July 2008.
The CPI rose 0.4% month-on-month in September after climbing 0.3% in August. Food prices rose by 0.9% month-on-month in September after rising 0.4% in August, the largest increase since April 2020, driven by the jump in meat prices. Equivalent rents for homeowners’ primary homes rose 0.4% in September, the largest increase in five years, after rising 0.3% in August.
In addition, a survey conducted by the Federal Reserve Bank of New York showed that US consumer inflation expectations have reached a record high.
Data show that the median short- and medium-term inflation expectations in September reached 5.3%, achieving 11 consecutive months of rising, rising to the highest level since the launch of the 2013 consumer survey. The Fed had previously predicted that as of the end of this year, the US inflation index will reach 4.2% and reach 2.2% next year.
With the recent surge in energy prices, prices may rise further in the next few months. Accelerated inflation is putting tremendous pressure on the normalization of the Federal Reserve’s monetary policy.
Fed officials “Eagle” is pressing
Several Fed officials made hawkish remarks this week.
Fed Vice Chairman Clarida said, “I personally think that in terms of price stabilization tasks, the goal of’further substantive progress’ has long been reached, and it has almost reached the target in terms of employment tasks.”
Atlanta Fed President Bostic and Clarida have basically the same views on Taper, but Bostic said that this year’s inflation rate has lasted longer than policy makers expected, so it is not appropriate to call price increases anymore. As “temporary.”
“Big hawk” St. Louis Federal Reserve Bank President Brad said that he supports the Fed starting to reduce the pace of asset purchases next month and ending the plan next spring to raise interest rates if necessary to keep inflation down. He believes that the Fed should adopt an aggressive Taper timetable to prepare for timely use of interest rate hike tools when inflation becomes a major problem. He believes that the current high inflation rate as a temporary factor is roughly 50%, so the Fed needs to be prepared for this.
Fed taper during the year
The minutes of the meeting released by the Federal Reserve in the early hours of Thursday showed that policymakers hinted that they might begin to reduce their support for the economy during the crisis in mid-November, but they are concerned about the threat of high inflation and how quickly interest rates need to be raised to deal with it. There are still differences.
The minutes of the meeting stated that policymakers discussed the monthly reduction of US$10 billion in public debt and US$5 billion in mortgage-backed securities (MBS) purchases, but “several” members of the meeting tended to reduce the pace of debt purchases faster. The minutes of the meeting show that if the Fed decides to reduce the pace of debt purchases at its policy meeting on November 2-3, it may start to act in the middle of the month or mid-December.
The Fed may raise interest rates early
Compared with June, the Fed’s expectation of interest rate hikes in September has been advanced.
Judging from the dot chart in September, 9 committee members expect the Fed to start raising interest rates in 2022, and 7 in June; 6 committee members are expected to raise interest rates once in 2022, and 3 committee members are expected to raise interest rates twice in 2022. . Except for one committee member, all other committee members are expected to start raising interest rates in 2023, with 13 members in June.
On Wednesday, the interest rate implied in the US federal funds rate futures showed that the market expects the probability of the Fed to raise interest rates, which is expected to be as high as 90% in September next year!
The market’s interest rate hike is expected to be faster than the Fed’s decision-makers’ dot plot announced in September. Previously, the market’s interest rate hike expectations were more dovish than the Fed’s policymakers. I believe this expectation will continue as inflation rises in the future.
Will the interest rate hike be far after Taper is here?
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