Fed Governor Barr: "More Work Remains" ... Markets Put Odds of Another Hike Next Month at 71%

[Financial News]  

Michael S. Barr, a Federal Reserve governor, said on Sept. 23 (local time), "More work remains." His remarks indicated that another rate hike would be unavoidable, even though the Fed raised its benchmark rate by 0.25 percentage points on Sept. 16, following a two-day Federal Open Market Committee (FOMC) meeting and the first such increase in more than three years.
In response, U.S. Treasury yields surged across the board that day.
According to CNBC, Barr strongly signaled the possibility of another rate hike next month at a housing conference in Chicago, Illinois, that day.
He said, "My baseline scenario is that further policy adjustment is likely to be necessary," adding that the Fed "must ensure that inflation returns to its target in a timely manner." He continued, "The Fed wants to support sustainable, durable growth through maximum employment and price stability."
Barr's remarks came after S&P Global reported that the U.S. services index had surged to its highest level in nearly five years.
S&P Global's U.S. services index rose from 56.5 in August to 58.7 in September, its highest level in 59 months. The manufacturing index also remained elevated, climbing to 56.7, its highest level in 53 months.
The composite index, which combines the services and manufacturing sectors, came in at 58.4, its highest level in 62 months. On a scale where 50 is the benchmark, a reading above 50 indicates expansion in activity.
While the strength of the U.S. economy was confirmed, inflationary pressures were also found to have intensified. S&P Global said overall inflation had reached its highest level in nearly four years since October 2022, driven by higher oil prices, transportation costs and wages.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said, "Businesses' input costs rose at their steepest pace in four years in September," adding, "This was due to a sharp increase in fuel and transportation costs caused by higher crude oil prices this month." He continued, "This will add further upward pressure on selling prices and will emerge as inflationary pressure in the coming months."
According to S&P Global, companies are also expanding employment because of backlogged orders.
S&P Global noted that employment growth among companies responding to its PMI survey was the fastest since June 2022, calling it an exceptional increase since such statistics began being compiled in 2009.
Employment in the services sector grew at its fastest pace in more than four years, since June 2022, while manufacturing employment rose at its fastest rate in more than five years, since February 2021.
With U.S. business activity remaining robust and both employment growth and inflationary pressures running high, Barr's remarks about another rate hike have led financial markets to treat an October increase as virtually certain.
According to CME Group's CME FedWatch Tool, the interest-rate futures market puts the odds of the Fed raising its benchmark rate by another 0.25 percentage points at the FOMC meeting on Oct. 27-28 at 70.9%. The probability, which had risen from 8.8% a month earlier to 48.7% a week earlier and 55.4% a day earlier, jumped to nearly 71% that day.
Because the October FOMC meeting comes just before the midterm elections on Nov. 3, expectations of a rate hold had prevailed out of concern over the meeting's impact on the election. However, given the current economic trajectory, markets now believe it will be difficult for the Fed to postpone another hike.
Major Wall Street investment banks expect the Fed to raise rates at both of the two remaining FOMC meetings this year, in October and December.

[email protected] Song Kyung-jae Reporter