Fed To Continue Rate Hikes Amidst Rising Unemployment

The US Federal Reserve is expected to continue with its aggressive regime of raising interest rates in the next few months for curbing stubborn inflation.

However, traders are now betting that the US central bank may not increase the borrowing costs as much in the next year as had been anticipated.

This is due to the fact that the latest data showed wage growth slowing down and unemployment numbers rising in the largest economy in the world.

Economic data

On Friday, a report from the Labor Department showed that more than 315,000 jobs were added in the previous month in the US.

However, the unemployment rate rose from 3.5% to 3.7%, despite more workers joining in, and there was also a slowdown in the wage growth as compared to its rapid rise earlier.

Nonetheless, despite the data, traders are still expecting the Federal Reserve to increase the interest rate by 75 basis points in its meeting on September 20th.

This would mean that the benchmark rate would end up between 3% and 3.25%, but the probability of this happening was trimmed from 70% to 60%.

The Fed

Futures contracts that are connected to the policy rate of the US central bank for 2023 show that traders have priced in a rate of 3.75% to 4% by March.

Before the data release, the traders had priced in the rate to be around the top of this range. Market analysts said that the employment reports for August boasted a positive outlook.

They said that since wage growth has slowed down, it is likely that the Fed may also think about doing the same after hiking the interest rate by three-quarters of basis points in September.

Last week, Jerome Powell, the chief of the US central bank, said that they intended to increase the borrowing costs enough to reduce growth, tame inflation and to slowdown the labor market.

However, he had also stated that the magnitude of the rate hike in September would depend on the data they get before then.

Other data

Inflation is currently more than three times the 2% target of the Federal Reserve and close to a 40-year high.

While the jobs data is important, it will not be as relevant as the consumer price data and inflation expectations numbers that are expected in the coming weeks.

Both of these areas are of the utmost importance, as the Fed wants to bring down the demand that can meet the limited supply.

Market strategists said that while the Labor Department’s report was a step in the right direction, it was not enough.

They said that it would be the inflation data that would really determine the Fed’s action and would show whether the central bank would favor a 50 basis point, or a 75 basis points increase.

But, most people are less worried about inflation and more concerned about whether the economy can avoid a recession and if they can retain their jobs with the Fed being so aggressive.