“I remain willing to support raising the federal funds rate at a future meeting if the incoming data indicates that progress on inflation has stalled,” Fed Governor Michelle Bowman said.
That thought was echoed by Cleveland Fed chief Loretta Mester, who said: “I suspect we may well need to raise the fed funds rate once more this year.”
Fed Vice Chair for Supervision Michael Barr struck a more equivocal note, claiming the debate was less about another hike than how long rates stayed high.
Either way, this is not the sound of a Fed who thinks the inflation battle is won.
And the latest business soundings for September may have emboldened them to stay vigilant amid further signs the U.S. economy actually re-accelerated in the third quarter.
U.S. manufacturing picked up faster than forecast to its highest level of the year and employment appears to be expanding in the sector. Even though The Institute for Supply Management’s factory index remains in contractionary territory overall – the longest stretch since the 2007-2009 Great Recession – activity is clearly building again.
The good news for inflation worriers is that the prices paid by those businesses fell by more than 5 points during the month.
What’s more, the recent spike in crude oil prices appears to be going into reverse again.
Ahead of the OPEC+ meeting on Wednesday, crude oil prices fell back to their lowest in three weeks – dipping back below $88 per barrel and dragging year-on-year gains down to just 5%.
But in another pivotal week for U.S. labor data culminating in the September employment report on Friday, attention will flip to August job openings numbers later on Tuesday for clues about the ongoing tightness of the jobs market – central to the Fed’s deliberations.
Fed hawkishness, however, has kept futures markets pricing a 50-50 chance of another quarter point rate hike to the 5.50-5.75% range by year-end.
Whether the weekend’s stopgap measure to keep U.S. government open until Nov. 17 just builds more uncertainty into that year-end period leaves markets on edge entering the final quarter.
Rising 10-year nominal and real yields grind on regardless – as the Fed view combines with a rethink of a more high pressured economy longer-term as well as negative market dynamics and positioning.
A so-called ‘bear steepening’ of the 2-10 year yield curve to its least inverted in five months is an aggravator for bond funds, as is hedge fund activity that sees these speculators reluctant to cover huge short positions in Treasury futures.
Bond volatility captured by the MOVE index hit its highest in almost six weeks on Monday.
