Powell signals for more rate hikes, why?

Fed hikes by another 75 bps, with Fed chairman Powell saying rates will likely need to end higher than previously anticipated. Below are some key indicators of the US economy’s performance:  
1, Q3 US GDP returned to growth of +2.6% after consecutive declining quarters (Q1 -1.6%, Q2 -0.6%) 
2, The US job market remains strong, with unemployment rate still at an all-time low of 3.5% 
3, US stock markets have been up for 20 days, with Dow increasing 14% in October, its best performance since 1976

Multiple Democrats in Congress have written letters or directly spoken to Powell, raising concerns that the Fed’s inflation battle will have other consequences for the job market and broader economy. However, just as Former Treasury Secretary Lawrence Summers criticized, political pressure will undermine the independence of the Fed, and that’s the last thing Powell wants to see.

What is the Fed considering right now?
1. The key to taming inflation is to manage expectations of public perception. And the important thing to know is that rising prices can be conductive. When farmers think that transportation costs will increase, they will increase wholesale prices for agricultural products; when retailers think the price of products will increase, they will increase retail prices; when workers think retail prices will become more expensive, they will ask for wage increases or promotions. 
2. US economic data remains strong, and the Fed is prepared for economic disruption. Powell said in October that the Fed will do whatever it takes to tame inflation, even if it means a diminishing labor market. With unemployment rates still at a record low and roughly 1.9 job postings for every unemployed worker, there is still room for the Fed to tighten their monetary policy. 
3. The objective factors causing inflation still exist, such as supply chain challenges, higher energy costs, and geopolitical risks. That’s beyond the Fed’s responsibilities.

Further rate hikes will no doubt strengthen the dollar and keep US bonds much more attractive than equities. Is it worth it to take the path of an aggressive rate hike? 

The chart below shows US CPI over the past 50 years, and we are currently experiencing the third strongest CPI during this period, with the two strongest in the early and late 1970s.

However, the current Fed overnight rate is only between 3% to 3.25%, well below what it was during the 1970s, as shown in the chart below.

The US is experiencing one of the strongest inflation levels in 50 years, but the Fed rate is still maintaining its lowest level in history. Of course, we can say that the US social and economic structures have changed significantly over the past 20 years, and the younger generation has gotten accustomed to low interest rates and a high debt ratio. However, born in 1950s and in favor of Paul Volcker himself, Powell’s obsession over inflation control and rate hikes comes as no surprise.

#1. US job postings increase, keeping pressure on Fed

• US job openings unexpectedly rebounded in September amid low unemployment, despite Fed’s effort to cool down the labor market by increasing borrow costs for employers. 

• Employment openings for the month totaled 10.72 million, well above the FactSet estimate of 9.85 million. The data indicates that there are 1.9 job openings for every available worker.

#2. Bank of England raises key interest rate by 75 bps

• The central bank raised its benchmark lending rate to 3% from 2.25%, taking it to the highest level since November 2008. However, BOE sounded rather dovish as Bailey said that forecasts show BOE should not increase rates too far.

• The British pound weakened, and UK government bonds sold off in pre-market trading.

#3. FCC commissioner calls for TikTok ban

• The Council on Foreign Investment in the US (CFIUS) should take action to ban TikTok, said Brendan Carr, one of five commissioners at the Federal Communications Commission, in an interview.

•TikTok is currently in negotiations with CFIUS to determine whether it can be divested by Chinese parent company ByteDance to an American company and remain operational in the United States.

#4. Biden suggests extra tax on energy giants if they don’t increase oil production

• Biden will call on Congress to consider tax penalties for oil and gas companies accruing record profits, according to a White House official, amid stubbornly high gasoline prices that are dragging on Democrats’ midterm prospects.

• His comments came after ExxonMobil, Chevron and Shell reported record-high third-quarter earnings.

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