As reported by Reuters, the US Fed and it’s head chairman, Jerome Powell, face a tough task next week, when their Tuesday-Wednesday meeting is widely expected to conclude with a 0.25% rate hike, but a dichotomous US economy is raising warning flags while giving the green light at the same time.
Key highlights
Reuters notes that the US Fed is under extreme pressure from broader markets to raise interest rates at next week’s Fed meeting, as the US economy continues to pin the needle on jobs with unemployment sitting at 20-year lows, yet caution is demanded as the yield curve on Federal Treasuries continues to threaten to go inverted, a major bearish flag that an economic recession could be right around the corner.
Investors will be looking towards next week’s almost-guaranteed rate hike, but the Fed’s forecast looking out to 2021 and Powell’s press conference following the decision will see added emphasize and attention on the chairman’s choice of words. Too many more rate hikes will quickly see the yields on short-term US bonds pushed beyond the rates of long-term debt, an inversion that would signal a coming bear signal in the broader economy.
On the bullish side, unemployment is simply running out of room to fall, buried at 3.9% for over 17 months, and despite clear and obvious warning signs for the US economy, bulls may wind up forcing the Fed’s hand on rate hikes regardless.
For Oxford Economics U.S. economist Kathy Bostjancic, it is clear where they are headed: “The number of current voting members in the hawkish camp is rising and far outnumbers those in the dovish camp.” – Reuters
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