Is the FED thinking to pivot their way?
💡 #7 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
My research will cover the follow points:
During high market volatility, what investors can do for mitigating the risks and taking the best opportunities?
Fed it would be arriving to a pivot point?
How we can translate the stock wealth effect in terms of consumption?
The Okun’s law will help us this time to predict the unemployment rate?
During times of high market volatility, Charles Schwab suggests investors focus on holding high-quality bonds - such as Treasuries, investment-grade corporate bonds, and investment - grade municipal bonds.
Even minimizing exposure to riskier segments of the markets, such as high-yield and emerging- market bonds, until there are signs that the Fed is ready to slow down its pace of rate hikes.
Don't expect the Fed to stop hiking rates, Charles Schwab believes a good case can be made that market pressures may force it to slow the pace.
Further interest rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably.
If the stock wealth effect is still 2.5 cents, then the slide in stock prices to date would reduce consumer spending by 0.75% of GDP.
For an economy otherwise just skirting recession, this would be enough to push it over the edge. Of course, the wealth effect will be larger and the recession deeper if the stock market continues to slide. In a typical recession, stock prices fall by closer to 30% peak to trough.
Per Okun’s law, a 1-percentage point deceleration in GDP growth over the course of a year would trim employment growth by around 800,000 jobs per annum.
This would also increase the unemployment rate by about 0.5 percentage point and shave a few basis points off year-over-year growth in both the consumer price index and PCE deflator.
Foreign central banks have had to hike interest rates to stabilize their currencies and inflation, which usually involves selling U.S. Treasuries.
Even the Bank of Japan, which has welcomed higher inflation, intervened in the market to support the yen recently because it had fallen so rapidly. It was the first such intervention since 1998.
Tighter global financial conditions and persistent inflation pressures are also likely to require further monetary policy tightening in many major emerging-market economies, and limit the scope for any easing in countries where growth is slowing and interest rates have already been raised substantially.
In slamming on the monetary policy brakes, the Fed has laid the groundwork for lower inflation, but also raised the potential for global financial market stress to derail economic growth.
Labour market conditions are tight almost everywhere. In many OECD economies, unemployment rates are at their lowest levels of the past 20 years, while the ratio of jobseekers to vacancies remains historically low.
OECD affirm that policy rate increases are needed in most major advanced economies to ensure that forward-looking measures of real interest rates become positive and inflation pressures are reduced durably.
The war has pushed up energy and food prices substantially, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world.
In Japan, where underlying price pressures remain mild, the Bank of Japan is projected to maintain its current policy stance focused on yield curve control, with policy rates remaining unchanged.
The fragile stock market is also important to watch as the Fed pushes rates higher. Stock prices are sliding again, down almost 25% from the all-time high at the start of the year.
This translates into a loss in stock wealth of $12.5 trillion, of which an estimated $7.5 trillion is owned by U.S. households.
Thus the $7.5 trillion in lost stock wealth will reduce consumer spending by $75 billion in the coming year, equal to 0.3% of GDP.
As the Fed continues to tighten monetary policy, labor demand will weaken further, and more workers should be laid off. The path toward a soft landing is via a reduction in job openings with a minimal, if any, increase in the unemployment rate. This is a narrow path.
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.