As prices rise ever faster in NZ, the US and around the world, some analysts say the Fed must consider a massive 1% interest rate hike when it meets next month
Central bankers must be starting to wonder just what it will take to curtail rampant inflation that is showing no sign of cooling despite some of the steepest interest rate hikes in more than four decades.
Last week’s US consumer price growth was a reminder that, while the annual pace was little changed at 8.2 percent, the index produced another alarming jump on a monthly basis, suggesting underlying inflationary pressures are still accelerating.
Stripping out volatile items such as food and energy, the “core” CPI measure was up 6.6 percent compared with the same time last year. The larger than expected increase leaves the Federal Reserve with little choice but to press ahead with a fourth consecutive 0.75 percentage point increase at its upcoming policy meeting in early November.
Economists say it is also likely to push the US central bank to continue its supersized rate rises beyond that point and at least until there is more clear-cut evidence that price pressures are easing.
Some analysts are once again suggesting the Fed may have to consider a full 100bp hike when it meets next month.
There is now a widespread belief the Fed will extend its string of 0.75 percentage point rate rises to the end of the year and then slow to a half-point increase at the first meeting of 2023 in early February. That suggests the federal funds rate will peak at between 5 percent and 5.25 percent, well above the 4.6 percent level most officials had forecast as recently as September.
Adding to the gloomy sentiment, the International Monetary Fund at its annual gatherings with the World Bank said that the “darkest hour” for the global economy lies ahead. Chief among their concerns is the fallout from one of the fastest global monetary tightening campaigns, which threatens to cause a US dollar funding shock and tip vulnerable emerging and developing economies further into distress.
The International Monetary Fund cut its global growth forecast and its chief economist warned “the worst is yet to come”, adding that “for many people, 2023 will feel like a recession”.
What will also be concerning central bankers is a rapidly emerging wage price spiral that, once started, becomes extremely difficult to contain.
The University of Michigan’s monthly survey of US consumers showed expectations for price rises over the next 12 months had risen from 4.7 percent to 5.1 percent.
The Fed has been aggressively raising interest rates in an effort to bring down inflation, and keeps close tabs on consumer expectations, which can fuel worker wage demands and make it harder to reduce the inflation rate.
Wild market swings continue
Following the release of Thursday’s worse than expected US CPI data the S&P500 initially plunged more than 2 percent only to stage a dramatic reversal to close up 2.5 percent as investors bet that inflation had likely peaked.
But there was no follow through to the rally the following day with US stocks falling again on Friday to end the week down 1.5 percent.
In the UK, prime minister Liz Truss’s decision to sack recently appointed chancellor Kwasi Kwarteng and walk back a planned cut in corporation tax only added to the turmoil in financial markets.
The government’s “mini” Budget, delivered on September 23, had sparked a dramatic sell-off in UK bonds as investors took fright at the prospect of further borrowing. The volatility in the UK has cascaded into other markets, including US Treasuries, which saw the 10 year yield jump to 4 percent, its ninth consecutive week of gains as it reached a new 12 year high.
Liquidity in Treasury markets is also potentially a looming issue former Fed chair Janet Yellen warned last week.
As market watchers have been at pains to point out recently in the wake of the recent financial ructions in the UK, if the Treasury market seizes up the global economy and financial system will have much bigger problems to contend with than elevated inflation.
CPI here likely to be little changed since June
Local investors will be paying close attention to this weeks CPI data for the September quarter due out on Tuesday, though it’s unlikely the data will show inflation has eased that much since June’s reading which came in at 7.3 percent.
Economists are expecting a slight contraction to between 6.5 and 7 percent which remains well outside the Reserve Bank’s inflation target of 1 to 3 percent.
While the continued fall in the NZ dollar, which eased 0.8 percent last week to 55.6 US cents, will benefit exporters and the hard hit tourism sector, New Zealand remains heavily exposed to imported inflation, including oil imports.
The increasing likelihood that the kiwi dollar could well retest its 2001 low of 50 US cents in the coming months as the resurgent US dollar shows no signs of weakening will potentially become a serious hurdle for the local economy and a further headwind for the Reserve Bank to contend with.
Additionally, any serious dislocation of markets, which remains a real possibility, will only see the US dollar continue to strengthen as it always does in any crisis.
A couple more weeks like last week and those lows will almost certainly be retested.
Coming up this week
- Consumer Price Index (Sept qtr) – Stats NZ
- Vital Ltd AGM
- PGG Wrightson AGM
- Meridian Energy AGM
- Vehicle registrations
- Vulcan Steel AGM
- Auckland International Airport AGM
- Livestock Improvement Corporation AGM
- Move Logistics AGM
- International Trade (Sept) – Stats NZ
- Credit Conditions – Reserve Bank
- Credit Card Balances & Spending (Sept) – Reserve Bank