Analysts can speculate all they want, but Fed officials say their next decision will be based on hard economic data.
The key housing, employment, and inflation report this week are likely to have a big impact on the market because investors will be speculating about how those reports might affect the future direction of interest rates.
With just a few words on Wednesday, Fed Chair Jerome Powell crushed investors’ hopes of an interest rate pivot and sent stocks plunging.
A pause in the Fed’s current hike regime would be premature, Powell said. “We still have a lot of work to do,” he said.
The Fed may start slowing the pace of those painful hikes as soon as December, Powell said. “Our decisions will depend on the totality of incoming data and their implications for the outlook for economic activity and inflation,” Powell said Wednesday.
What will the Fed consider between now and December 14?
There is no relief in sight for the Fed’s nerves from Friday’s jobs report, which comes at a time when the US labor market is super tight.
According to the government report, the economy added another 200,000 jobs in October, down from last month, but still, a very strong number as labor demand continues to outpace supply.
Inflation will increase. Businesses will need to pay higher wages to attract workers and be able to charge more for goods and services. The Fed will be closely monitoring hourly wage growth in the report.
Another jobs report is expected in December, ahead of the Fed meeting. If both show a downward trend in employment, that might be enough to placate Fed officials, even if the unemployment rate remains historically low.
Before the next Federal Reserve meeting, two major inflation indexes are expected to release new data. On November 10, the Consumer Price Index (CPI) for October, which tracks changes in prices of fixed goods and services, will be released.
A 0.6% month-over-month increase in core CPI, which excludes oil and food, matched August’s pace, well above expectations of a 0.4% rise, not a great sign for the Fed. Analysts expect another large 0.5% rise in October. The Fed will also get to see October data from its favored measure of inflation, Personal Consumption Expenditures (PCE), on December 1.
It is believed that PCE is more accurate than CPI because it accounts for a broader range of purchases from a wider range of buyers than CPI. According to Refinitiv, core PCE rose by 5.1% on an annual basis in September, higher than the 4.9% recorded in August but below the consensus estimate of 5.2%.
Housing
As a result of the Fed’s battle against inflation, the housing market has been deeply impacted and is showing signs of cooling.
In the past week, 30-year fixed-rate mortgages averaged 6.95%, up from 3.09% just a year ago. High borrowing costs are contributing to a decline in home sales.
After the pandemic, the housing market was very overheated due to high demand and low-interest rates, said Powell on Wednesday. “Our policies have had a very large impact on that.” Ahead of the next meeting, October’s new and existing home sales numbers will demonstrate the impact of that policy.
By Orlando J. Gutiérrez