The big event of the week for financial market participants is the Federal Reserve meeting. Tomorrow, the FOMC statement and press conference will reveal what the Fed thinks of the current economic environment and the path of interest rates.
During the summer months, many traders and investors believed the central bank would pivot on its goal of raising the funds rate. He does not have.
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Here are two reasons why the Fed will continue to climb despite rising recession risks:
- Resilient labor market
- Core prices remain high
Inflation and monetary indicators point to recession risks
Tightening policy in a recession is never a good option for a central bank. However, the Fed could be tricked into doing so.
While most inflation and monetary indicators point to recession risks, the labor market and high inflation are supporting more Fed hikes.
For example, initial jobless claims and commodity prices signal a recession, as do most monetary indicators, such as the real monetary base or the yield curve.
The labor market remains resilient
A resilient labor market gives the Fed the confidence to rise again. Payroll growth averaged 378,000 during the summer months, indicating that the economy can absorb further monetary tightening.
Job creation is part of the Fed’s mandate; thus, the Fed is not afraid to deliver another rate hike while the labor market is outperforming.
Slow deceleration in underlying prices
Inflation is the main reason the Fed is tightening policy at such a pace. The slow deceleration in underlying prices is unconvincing, as they show no significant reversal in the inflation trend.
Based on the Jackson Hole speech, Fed Chairman Powell sees tackling high inflation as the Fed’s top priority. Therefore, the Fed will continue to climb even though most monetary and inflationary indicators point to an upcoming recession.
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