- This paves the way for US GDP growth to head to 1% or below and labour market to begin cooling
- More hikes in 2023 possible, but a recession could also pave for the way for cuts late next year
- We are watching liquidity tightness and currency volatility marker as QT continues and dxy soars
- That would imply pain for hard currency debt issuers and those looking to raise capital
- There is no near-term silver lining, we’re afraid
Related insights_tr
Fed review: 5% Funds rate in play
The key message from the September meeting of the US Federal Reserve’s Open Market Committee was not the widely expected, unanimously voted, 75bps rate hike, taking the top end of the target rate to 3.25%. Instead, it was the extraordinary ratcheting up of hawkishness. US Federal Reserve officials have raised their policy rate forecasts by 100bps between June and September of this year. This shift, as indicated by the “dot-plot” of their projections, puts a terminal rate of around 5% in play, something that was unthinkable by most. This is especially the case since growth projections worldwide have been revised down in recent months, commodity and shipping prices have corrected considerably, and interest rates are already above what is widely considered to be the neutral rate.
But in their frustration with sticky core inflation, the focus of the Fed officials has shifted decidedly toward wages and shelter, which, by extension, makes the rate of unemployment the key outcome to watch. The prevailing rate (3.7%) is considered way too low, and if a recession or near-recession like conditions are warranted to push it above 4%, Fed officials are willing to entertain that. We gleaned that message from Chair Powell’s press conference remarks after the FOMC meeting.
As we discuss the Fed Funds rate going from 3% to 4% and beyond, some perspective is warranted about the profound shift in the monetary policy landscape. Just a year ago at this time, the Fed was signalling that rates might stay near zero for another year, and it was purchasing Treasury and mortgage securities to provide additional stimulus. Now 75bps hikes have become near-routine, along with substantial and steady withdrawal of liquidity from the markets.
We now expect another 75bps rate hike in the next meeting (November 2), followed by a 50bps rise (December 14), taking the end-2022 Fed Funds rate to 4.5%. It is conceivable that both economic and financial conditions will have tightened sufficiently by then to warrant a lengthy pause thereafter, but given the Fed officials eagerness to cool down the labour market, they may remain on the path of some additional tightening in Q1 as well. We are therefore pencilling in 50bps of further rate hikes between the February and March meetings, but only with even odds.
Implications for growth and inflation are clear; this type of tightening will soften hiring and activities, with core PCE inflation easing through 2023 to below 3% toward the end of the next year. Growth will be 1% or lower, and joblessness will rise. Will a million and a half Americans have to lose their jobs (pushing up unemployment toward 4.5%) to bring inflation down to comfortable levels? We fear so.
What are the global risks? We are looking at the markers for liquidity tightness and currency volatility as QT continues and DXY soars. That would imply pain for hard currency debt issuers and those looking to raise capital. With risk-free rates heading to 4% and beyond, a massive repricing of asset valuation is on the cards. There is no near-term silver lining, we’re afraid.
To read the full report, click here to Download the PDF.
Topic
Explore more
E & S FocusThe information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.