Early Thursday morning Beijing time, the Federal Reserve released the minutes of the September Federal Open Market Committee (FOMC) policy meeting.
The minutes showed that uncertainty surrounding the US economy, including the state of financial markets and the impact of union strikes, contributed to the Fed's final decision to adopt a cautious stance. Some officials argued that the policy focus should then shift from raising interest rates to discussing how long to keep them at restrictive levels. After the release of the meeting minutes, the US stock market shook higher to recover losses, the dollar and long-term US Treasury yields fell.
Uncertainty exacerbates policy risk
The Fed voted unanimously last month to keep interest rates unchanged. "A large majority of participants continued to view the future path of the economy as highly uncertain," according to the minutes.
Participants saw data volatility and revisions to prior statistics as presenting a host of problems in assessing the economy, as well as in determining the extent to which effects such as the neutral interest rate, rising real interest rates, and tight credit would eventually curb business borrowing and spending. All of this was seen as supporting caution in determining the extent of additional policy that might be appropriate, according to Fed officials.
Participants generally agreed that policy risks had become more two-sided and that it was important to balance policy risks of too much tightening and not enough tightening, the minutes said. Commodity markets and a strong housing market are likely to lead to higher inflation, but tighter financial markets, slower global growth and recent Labour strikes pose risks to growth and jobs.
Fed officials have said the economy's steady performance has kept unemployment low despite aggressive rate hikes. But concerns are growing about the risks of raising rates too quickly and slowing economic activity, which could lead to massive layoffs.
Most participants thought that one more rate hike would likely be appropriate. "Several Fed officials commented that, with the policy rate likely to be at or near its peak, the focus of monetary policy decisions should shift from the extent to which the policy rate should be raised to the duration of keeping it at a restrictive level." The minutes say.
In economic forecasts released last month, the Fed cut its forecast for rate cuts next year from 100 basis points to 50 basis points. A number of participants said that the speed at which inflation returned to the Fed's 2 percent target would influence their views on the level of sufficient restraint for the policy rate and for how long it would remain so.
Economic cooling and soft landing
For the Fed, in addition to inflation, a soft landing will also be an important consideration for the policy path. The market widely expects the US economy to enter a cooling period after accelerating its rebound in the third quarter. In fact, since the September meeting, Fed funds futures have shown continued skepticism about another Fed rate hike, with the probability of a November rate hike now at 9% and a December rate hike at 28%.
Two surveys by the Conference Board and the University of Michigan showed consumer confidence fell for a second straight month as respondents grew more worried about the economic outlook. "Consumers remain relatively hesitant about the trajectory of the economy." It will be mentioned in the report.
Craig Erlam, senior market analyst at OANDA, said in an interview with First Financial reporter that although consumer spending continues to remain vibrant, there are signs that the US economy has begun to cool, and with the lagging effect of monetary policy, the Federal Reserve will maintain high interest rates for a longer period of time. The impact on demand resilience and business activity will become more obvious, challenging the soft landing of the economy.
The latest figures show US consumer credit fell by $15.6bn in August. That was the biggest drop since May 2020. The decline in credit is more associated with non-revolving credit, such as auto and student loans. Student loan and interest payments to the government have been suspended since the pandemic, but interest began accumulating again in September after the Biden administration's plan to provide debt relief fell through. Some student loan borrowers appear to have started making payments early to avoid additional interest, which could be a sign of growing financial stress.
Auto loans continue to fall in the United States
Erlam told First Finance that the next economic slowdown will further impact the job market, the impact of rising unemployment on consumption will become more obvious, the repayment of student loans will also affect many people's spending plans, and the gradual reduction of excess savings since the epidemic and the increase in credit card repayment pressure will eventually feed back on the vitality of the consumer side.
It is worth noting that corporate bankruptcies in the United States are also accelerating, which may also signal a crisis. Corporate bankruptcy filings continued to rise in September, reaching 516 by the end of the third quarter, which would be the highest since 2010 if the trend continues, according to data released by S&P Global on the 11th. Credit analysts have warned that companies with lower credit ratings that have been forced to rely on floating rate loans are looking increasingly vulnerable. Goldman Sachs warned earlier this week that nearly half of publicly traded companies in the United States are on the edge of break-even, making them particularly vulnerable to rising interest rates.
Wall Street has been sounding warnings lately. Deutsche Bank reports that it is increasingly likely that this winter will be dominated by an El Nino weather pattern similar to what happened in 1971, and that the expected instability will make it harder for policymakers to restore price stability. "In the event of another shock, inflation would remain above target for the next two years. History shows that the last mile of inflation is often the toughest."
Paul Tudor Jones, the legendary hedge fund manager and founder and chief Investment officer of Tudor Investment, believes the U.S. economy will fall into recession in the first quarter of next year and that $1 trillion in savings, tax increases and spending cuts will be needed over the next two years to improve government finances. But neither has a chance of happening.