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Will US Fed go ahead with plans to trim interest rate hikes, or shift back to inflation fighting mode?

US markets ended Monday lower, as investors believe the better-than-expected data from the services sector could lead the Federal Reserve to stick with its aggressive interest rate increases. 

Will US Fed go ahead with plans to trim interest rate hikes, or shift back to inflation fighting mode?
Last Wednesday, US Fed Reserve chairman Jerome Powell said the central bank could scale back its pace of interest rate hikes as soon as this month. (Photo: Getty Images North America/Kevin Dietsch via AFP)

SINGAPORE: The United States Federal Reserve is likely to push ahead with plans to slow interest rate hikes in the fight against red-hot inflation, despite the latest data suggesting it should do otherwise, said analysts on Tuesday (Dec 6). 

Two latest reports released this month showed strong jobs growth and better-than-expected service sector activity. 

US markets ended Monday lower, as investors believe the data could lead the US Federal Reserve to stick to its aggressive interest rate increases. Policymakers have been trying to curb spending by making it more costly to borrow.

“So the question now is whether the last couple of days of stronger-than-expected economic numbers, is that going to be enough to knock the Federal Reserve off of its slight dovishness here and renew their rate hikes?” said Mr David Dietze, managing principal and senior portfolio strategist at Peapack Private Wealth Management. 

FIGHT AGAINST INFLATION FAR FROM OVER

Last Wednesday, US Fed chairman Jerome Powell said the central bank could slow interest rate hikes as soon as this month. 

Mr Powell cautioned that the war against inflation is far from over and that the Fed's monetary policy will have to stay tight for some time to restore price stability.

Meanwhile, US services sector data showed that activity unexpectedly picked up last month. The US economy also added 263,000 jobs last month, defying aggressive action from the Fed to tame inflation. 

Mr Dietze believes the economic momentum is “not automatically going to translate into much worse-than-expected inflation”.

The Fed wants a strong economy, and is “very concerned about not producing a recession”, he told CNA’s Asia First. 

"So I'm not sure that the Fed is ultimately going to all of a sudden turn much hawkish based on these two single reports," he added.

The Fed has been trying to tame inflation not seen since the 1980s while avoiding tipping the US into a recession.

CONCERNS OVER FED OVERTIGHTENING TOO QUICKLY

The Fed has raised the benchmark lending rate by 0.75 percentage points four consecutive times in recent months, out of six rate hikes this year, in an effort to rein in rising prices.

The latest increase - on Nov 2 - took the benchmark lending rate to between 3.75 and 4 per cent, the highest since January 2008.

The terminal federal funds rate is likely to stay at between 5 per cent and 5.5 per cent, which analysts believe will be reached by the end of the first quarter next year.

Observers have been concerned over the Fed overtightening too quickly. 

“The markets are certainly looking for maybe 50 basis points hike at the next meeting,” said Mr Paul Kalogirou, managing director and client portfolio manager of global multi-asset solutions at Manulife Investment Management. 

“Whether they do go 50 or whether they go 75 at the next meeting, I think the jury's still out there,” he told CNA’s Asia First.

However, inflation remains elevated and growth could slow, Mr Kalogirou cautioned. “Therefore, we still have these fairly tricky markets to navigate over the course of the year.”

Source: CNA/ca(ja)

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