[Summary] Fed Mentioned Economic Slowdown 13 Times... Bullard Says US Interest Rate Must Rise to 4.75%

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. central bank, the Federal Reserve (Fed), mentioned 'recession' a total of 13 times in its economic outlook report, revealing a darker economic forecast. Concerns about recession were reported nationwide, and some regions also confirmed signs of labor market cooling. However, despite these recession warnings, the Fed's high-intensity tightening to curb inflation is expected to continue. James Bullard, president of the Federal Reserve Bank of St. Louis, known as a representative 'hawk,' emphasized that the U.S. benchmark interest rate should be raised to 4.75%.

◆Looking into the Fed Beige Book... "Labor demand cooling in some areas"

In the Beige Book, an economic trend report released on the 19th (local time), the Fed stated that "recent economic activity in the U.S. has modestly expanded overall," but also revealed that concerns about recession are rising nationwide. The Beige Book evaluates economic trends in the 12 Federal Reserve Bank districts from mid-September to October 7. It serves as a basis for the regular Federal Open Market Committee (FOMC) meeting scheduled for November 1-2.

According to the Beige Book, economic activity in the U.S. was generally modest but varied by industry and region. Four regions remained at previous levels, but two regions showed weakened or slowed demand due to higher interest rates, inflation, and supply chain disruptions. The Beige Book stated, "Amid growing concerns about weakening demand, the outlook is more pessimistic," adding, "In some areas, as concerns about recession increase, companies are hesitant to add wage payments."

Recession concerns were particularly confirmed in several regions nationwide. The Boston Fed reported, "As recession fears spread, economic outlooks have become increasingly pessimistic." Some companies also froze hiring. The Philadelphia Fed also noted an increase in recession mentions. The Chicago Fed predicted slower growth in the coming months amid recession concerns. The word 'recession' appeared 13 times in the October Beige Book, more than the 10 mentions in the September Beige Book.

The labor market was also confirmed to be cooling in some regions. About half of the regions assessed that difficulties in hiring and retaining staff had somewhat eased, but some mentioned that labor demand was slowing. Reports also included companies hesitating to hire new employees amid recession fears.

Regarding inflation, some regions reported slight easing. The Beige Book evaluated, "Inflation expectations have generally softened," adding, "Wage increases are expected to continue but show signs of slowing."

This economic diagnosis draws attention amid growing recession fears due to the Fed's aggressive rate hikes this year. The Commerce Department's report on September housing starts showed an 8.1% decrease from the previous month, far below market expectations. Particularly, single-family housing starts fell to the lowest level since May 2020. With mortgage rates recently exceeding 7% due to the Fed's high-intensity tightening, signs of cooling in the housing market are confirmed. Earlier, the October Housing Market Index (HMI), which measures homebuilders' sentiment, recorded the lowest level in 10 years except for the early pandemic period.

Recession warnings are also pouring in. Following Jamie Dimon, chairman of JP Morgan Chase, known as the 'Emperor of Wall Street,' Jeff Bezos, chairman of the board and founder of the world's largest e-commerce company Amazon, joined the warning ranks. The day before, he posted an interview video of David Solomon, CEO of Goldman Sachs, warning about the possibility of a U.S. recession on his Twitter, expressing concern: "Yes. The current economic possibilities tell us to prepare for a crisis."

◆"Interest rates should rise to 4.5~4.75%" Hawkish Fed officials continue remarks

The Fed is likely to implement a giant step (a 0.75 percentage point increase in the benchmark interest rate) at the November FOMC regular meeting to curb persistent inflation. This would be the fourth consecutive giant step. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects over a 95% probability that the Fed will raise rates by 0.75 percentage points in November.

Hawkish remarks from Fed officials continue. James Bullard, a representative hawk, said in a Bloomberg TV interview that to exert meaningful downward pressure on inflation, the benchmark interest rate needs to approach 4.5% or 4.75%. Considering the current U.S. rate is 3.0~3.25%, he believes at least an additional 1.5 percentage point increase is necessary.

This is the same level as the upper bound of the U.S. rate outlook early next year, previously indicated by Charles Evans, president of the Chicago Fed. After the last FOMC, the Fed presented a median rate of 4.4% for the end of this year and 4.6% for next year through the dot plot. Following the release of the U.S. September core Consumer Price Index (CPI), which rose at the largest pace in 40 years, investment bank Barclays raised its U.S. rate outlook for February next year to 5.0~5.25%.

Bullard predicted that after continuing high-intensity tightening until early next year, 2023 will be "a year when inflation eases." He also forecast that after maintaining this aggressive rate hike stance through the first half of next year, the Fed will shift policy direction while keeping rates high. He added that the Fed does not intend to raise rates forever.

Neel Kashkari, president of the Minneapolis Fed, who was considered a representative dove, also raised his voice to continue rate hikes. At an online event that day, he expressed concern that "core inflation, excluding volatile food and energy, continues to rise." He also identified service and wage-related inflation as two key elements for future monetary policy direction.

Kashkari said he is "very concerned" about the rise in core inflation and emphasized, "We are looking for evidence that the upward trend has stopped, but have not found it yet. Until then, rate hikes should not be stopped."

This content was produced with the assistance of AI translation services.