U.S. slows, but not fast enough for Fed

With the U.S. Federal Reserve continuing to jack up interest rates, the U.S. economy is slowing — but not enough to derail the Fed just yet, says Moody’s Investors Service.

In a new report, the rating agency said the latest U.S. data — including weaker job growth, rising unemployment, and softer manufacturing index readings — confirm the economy is slowing.

“The labour market is cooling in tandem with moderating wage growth,” the report said, adding that these metrics are approaching levels more consistent with the Fed’s 2% inflation target, but are still somewhat elevated.

Additionally, while the Institute for Supply Management’s (ISM) latest services index reading for October dropped from the previous month, the index “remains firmly in expansion territory, supported in part by the consumer spending shift to services from goods,” Moody’s noted.

These pockets of strength indicate “there is still some ground to cover before slower activity begins to weigh on inflation or the Federal Reserve’s tightening plans,” Moody’s said.

Since the Fed began hiking rates in March, the Fed funds rate has risen by 375 basis points. The report said that financial and economic conditions have tightened since then, but the lag in monetary policy fallout means “the rate hikes’ effects have yet to fully express themselves in the U.S. economy, which we expect to slow into 2023.”

As the Fed tries to anticipate the lagging effect of tightening, Moody’s said that it expects “the Fed will moderate the magnitude of interest rate hikes beginning in December, but continue policy tightening to a higher terminal rate than communicated in [its September projections].”

Staff

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