As inflation in the United States cools, the market is betting that the Federal Reserve may soon turn to interest rate cuts. Investors now believe that the possibility of the Federal Reserve cutting interest rates in a few months is much greater than the possibility of another rate hike in the foreseeable future.
But according to S&P Global Ratings, the Fed's interest rate hike journey may not be over yet, and the agency expects an additional 25 basis points hike in December.
The agency predicted on Tuesday that the Federal Reserve may carry out "ultimate interest rate increase" next month due to the weakening role of the US treasury bond bond yield in tightening the financial environment.
Last month, the soaring yield of US treasury bond bonds pushed the long-term interest rate to more than 5%, but it has fallen sharply recently.
S&P said that the soaring treasury bond bond yield has tightened the financial environment, prompting the Federal Reserve to stabilize interest rates between 5.25% and 5.50% for two consecutive times. But since then, the financial situation has eased somewhat, increasing the possibility of the Federal Reserve raising interest rates again.
S&P pointed out that the US Treasury Department plans to issue more bonds with shorter maturities in the coming months, easing the pressure on the yield of 10-year treasury bond bonds.
In addition, the lower than expected consumer price report for October prompted the market to rule out the possibility of further interest rate hikes and advance the expectation of interest rate cuts to early 2024. But the report states that the expectation of easing core inflationary pressures has been somewhat exaggerated, which requires the Federal Reserve to maintain a hawkish stance.
On Tuesday local time, Federal Reserve Governor Bauman also stated that rising inflation may trigger more interest rate hikes. She stated that she tends to further tighten monetary policy to bring inflation back to the Federal Reserve's target of 2%.
Rapid shift towards interest rate cuts next year
However, S&P also stated that after raising interest rates next month, the Federal Reserve will quickly turn around in June next year, when the monthly non farm payroll report will turn negative and inflation will approach the target.
As the impact of monetary policy on the labor market becomes more apparent, the Federal Reserve will further lower interest rates in the second half of next year. The institution predicts that by the end of 2024 and 2025, interest rates will decrease to 4.6% and 2.9%, respectively.
"If the downside risk of economic growth becomes a reality, the Federal Reserve will not hesitate to further cut interest rates. If the economy continues to prosper, the restrictive stance may last longer," said S&P.
In S&P's view, an increase in capital costs will weaken recruitment in the United States and lead to an increase in unemployment rate from 3.9% to 4.6% in 2025. The slowdown in economic growth will also lower labor demand.