Despite a recent surge in U.S. Treasury yields, key officials from the Federal Reserve have expressed caution regarding interest rate hikes, significantly reducing the likelihood of an increase at the upcoming Federal Open Market Committee (FOMC) meeting. Attention is now turning to the U.S. non-farm payroll report for September, which will be a crucial indicator for rate decisions.
According to the CME FedWatch Tool, which tracks market expectations for Fed rate changes, the probability of the Fed holding rates steady at the FOMC meeting scheduled for October 27-28 has risen to 74% as of 5:50 PM KST on October 2. This marks a significant increase from just 35% a week ago. Conversely, the likelihood of a 0.25 percentage point rate hike has plummeted from over 60% to 26% in the same timeframe.
This shift in expectations is largely attributed to recent comments from Fed officials advocating for a cautious approach to rate increases. The discussion was sparked by John Williams, President of the New York Federal Reserve, who stated on September 29 that there is no need to rush into rate hikes. He noted that the recent rise in Treasury yields reflects positive economic outlooks, increased investment in artificial intelligence, and geopolitical tensions, but reassured that these factors do not alter the long-term inflation outlook.
On October 1, Fed Vice Chair Philip Jefferson emphasized the need to carefully assess data trends, changing forecasts, and risk factors before making policy adjustments. Similarly, Michelle Bowman, the Fed's Vice Chair for Bank Supervision, indicated that there is no urgent need for additional measures, suggesting that the effects of last month's rate hike should be monitored further.
This cautious stance comes amid generally stable economic and inflation indicators in the U.S. The Conference Board's consumer confidence index for September, released on September 29, fell to its lowest level in 12 years due to concerns over inflation and the job market. However, the Fed's preferred inflation measure, the core personal consumption expenditures (PCE) price index for August, rose by only 0.2%, below the expected 0.3%, easing inflation concerns. Additionally, the final GDP growth rate for the second quarter was revised upward to 2.2%, a 0.7 percentage point increase from the previous estimate of 1.5%.
Despite the 10-year Treasury yield surpassing 5.3%—its highest level since 2002—there is a growing belief that the U.S. economy and inflation outlook remain stable. Fed Chair Kevin Warsh also expressed in a press conference following last month's FOMC meeting that there is no need to harm the labor market to achieve their goals, indicating a reluctance to aggressively pursue rate hikes.
Market expectations are shifting towards a slower pace of rate increases. Goldman Sachs has pushed back its forecast for the next rate hike from October to December, while JP Morgan anticipates a December hike but does not expect a prolonged tightening cycle.
Focus on September Non-Farm Payroll Report
However, some Fed officials continue to advocate for tightening measures. Dallas Fed President Lorie Logan stated in a speech on October 1 that rates should be increased by an additional 0.50 percentage points to control inflation. Minneapolis Fed President Neel Kashkari also suggested that a tightening stance may be necessary through 2027.
As the Fed bases its rate decisions on economic indicators, all eyes are on the U.S. non-farm payroll report set to be released at 9:30 PM KST on October 2. If the employment data falls short of expectations, the likelihood of a rate hold could increase. Conversely, if the report significantly exceeds forecasts, calls for another rate hike may resurface.
According to Reuters, the non-farm payrolls are expected to show an increase of 90,000 jobs in September, down from 162,000 in the previous month, with the unemployment rate projected to remain at 4.1%. However, Reuters notes that the slowdown in job growth is a natural consequence of the U.S. government's adjustments to seasonal factors in measuring employment data.
Therefore, if the employment figures fall within expected ranges, they are unlikely to have a significant impact on the Fed's rate decision. Joe Brusuelas, chief economist at RSM, stated that this report is expected to reaffirm the current trend of 'low employment and low turnover' in the U.S. labor market, suggesting that there will be no compelling reason to alter the Fed's current trajectory of one additional rate hike this year.
* This article has been translated by AI.
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