Investors looking for clues as to what the Federal Reserve will decide during its December policy meeting got quite a few this week. But these clues to the future of monetary policy point to an outcome they will not be very happy about.
What’s happening: Federal Reserve officials made a series of speeches this week suggesting aggressive rate hikes to fight inflation would continue, fueling investor hopes of an imminent change in policy from the central bank. On Thursday, St. Louis Federal Reserve President James Bullard said the central bank still has work to do before bringing inflation under control, which sent the S&P 500 down more than 1% in early trade. It later paired losses.
Bullard, a voting member of the rate-setting Federal Open Market Committee (FOMC), said the Fed’s steps to combat inflation so far have not been enough. “In order to reach a sufficiently restrictive level, the policy rate must be increased further,” he said.
The comments come a day after Kansas City Fed Chair Esther George, a voting member of the FOMC, told the Wall Street Journal that she was “looking at a job market so tight I don’t know how.” They continue to bring inflation levels down without a real slowdown, and we may even need a contraction in the economy to get there.”
San Francisco Fed Chair Mary Daly added on Wednesday that a pause in rate hikes was “off the table.”
A numbers game: Fed officials should raise interest rates to anywhere between 5% and 7% to curb inflation, Bullard said Thursday. Those numbers shocked investors as they would require a series of significant and economically painful increases that increase the likelihood of a hard landing.
The current interest rate ranges between 3.75% and 4%, and the median FOMC participant forecast a peak rate of 4.5-4.75% for September. If those numbers hold steady, Fed members would hike rates just another three-quarters of a percentage point.
But Fed Chair Powell said at the November meeting that forecasts are likely to rise in December, and if Bullard is right, that means investors can expect further rate hikes of one to three percentage points.
Dream about a fulcrum: Weaker-than-expected October CPI and producer price data boosted investor hopes that the Fed could ease its aggressive rate hikes, sending markets to their best day since 2020 last week.
But news from Fed officials this week has brought Wall Street back to earth.
That’s because market rallies help the economy expand, said Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab, which is the opposite of what the Fed is trying to achieve with its tightening policies. Fed officials may try to do some “jawboning” by overly hawkish talk to bring markets down, she said.
The bottom line: Investors are listening closely to Bullard’s comments because he’s known for having looser lips than other Fed officials, Bleakley Financial Group chief investment officer Peter Boockvar wrote in a note Thursday. But his hawkish predictions may have been “overblown,” especially since he won’t be a voting member of the FOMC next year.
Still, Wall Street analysts are listening. Goldman Sachs raised its peak interest rate forecast to 5-5.25% from 4.75-5% on Thursday.
A string of high-profile layoffs rocked Big Tech this month.
Amazon confirmed layoffs had started at the company and would continue into next year, just days after several stores reported that the e-commerce giant planned to cut around 10,000 employees. Facebook parent Meta recently announced 11,000 job cuts, the largest in the company’s history. Twitter also announced sweeping job cuts after Elon Musk bought the company for $44 billion.
The string of high-profile layoff announcements raised fears that the labor market was weakening and that a Recession could be around the corner.
Those fears are not unfounded: the Federal Reserve is actively working to slow economic growth and tighten financial conditions to rebalance the white-hot job market. More layoffs in both tech and other industries are likely inevitable as the Fed continues to raise interest rates.
But this wave of layoffs isn’t as significant as the headlines might have Americans believe. Thursday’s weekly jobless claims actually declined 4,000 to 222,000 despite a surge in tech job cuts.
In a note on Thursday, Goldman Sachs analysts outlined three reasons why the layoffs may not portend a looming US recession.
First of all, the technology industry makes up a small percentage of total employment in the US. While IT companies make up 26% of the S&P 500’s market cap, they account for less than 0.3% of total employment.
Second, tech job openings remain well above their pre-pandemic levels, so laid-off tech workers should have a good chance of finding new jobs.
Finally, tech layoffs have historically often increased without a corresponding increase in the overall number of layoffs, and historically have not been a leading indicator of an overall deterioration in the job market, Goldman analysts have found.
“The main problem in the labor market is still that the demand for labor is too strong, not too weak,” they concluded.
Mortgage rates fell sharply last week after a slew of economic reports suggested inflation might finally be easing, my colleague Anna Bahney reports
The 30-year fixed-rate mortgage averaged 6.61% for the week ended November 17, up from 7.08% the week before, according to Freddie Mac, the biggest weekly decline since 1981.
But that’s still significantly higher than a year ago, when the 30-year fixed rate was at 3.10%.
“While the fall in mortgage rates is welcome news, there is still a long way to go for the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains high, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”
Affording a home of your own remains a challenge for many homebuyers. Mortgage rates are expected to remain volatile for the remainder of the year. And prices remain high in many areas, particularly where there is a very limited inventory of homes for sale.
At the same time, inflation and rising interest rates mean that many potential buyers are faced with tight budgets.