The big event of the week for financial market participants is the Federal Reserve meeting. Tomorrow, the FOMC statement and the press conference will reveal what the Fed thinks about the current economic environment and the interest rate’s path.
During the summer months, many traders and investors thought the central bank would pivot on its goal of hiking the funds rate. It did not.
Here are two reasons why the Fed will keep hiking despite recession risks mounting:
- Resilient job market
- Core prices remain elevated
Inflationary and monetary indicators signal recession risks
Tightening the policy into a recession is never a good option for a central bank. However, the Fed may be trapped and forced to do so.
While most of the inflationary and monetary indicators signal recession risks, the job market and the elevated inflation support more hikes from the Fed.
For instance, initial jobless claims and commodity prices signal a recession, and so do most monetary indicators, such as the real money base or the yield curve.
Job market remains resilient
A resilient job market gives the Fed confidence to hike again. Payroll growth averaged 378k during the summer months, indicating that the economy can absorb additional monetary tightening.
Job creation is part of the Fed’s mandate; thus, the Fed has no fears of delivering another rate hike while the job market outperforms.
Slow deceleration in core prices
Inflation is the main reason why the Fed tightens the policy at such a pace. The slow deceleration in core prices is not convincing, as they do not show a meaningful reversal in the inflation trend.
Based on the Jackson Hole’s speech, Powell, the Fed’s Chair, views combating high inflation the Fed’s main priority. Hence, the Fed will keep hiking even if most of the monetary and inflationary indicators point to an upcoming recession.
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