The risk of a hard landing in the U.S. economy is growing and may even increase in 2024. Statistics show that the Fed has successfully curbed inflation by raising key rates. After hiking it 11 times, the U.S. Fed has contained its enthusiasm for three consecutive meetings by keeping the rate hike on pause. On this basis, we can assume that the regulator's restraining cycle is over, and it is time to assess the effect on the economy.
The risk of a hard landing in the U.S. economy is growing and may even increase in 2024. Statistics show that the Fed has successfully curbed inflation by raising key rates. After hiking it 11 times, the U.S. Fed has contained its enthusiasm for three consecutive meetings by pausing the rate hiking. The regulator's restraining cycle is over, and it is time to assess the effect on the economy.
Hard landing of the U.S. economy
The Fed interest rate hike usually does not immediately lead to a slowdown in economic growth. It takes time for the effect of high rates to be transferred through the mortgage and consumer credit market into the economy. Historical data show that, on average, 2–3 years pass from the beginning of a rate hike cycle to the start of a recession in the U.S. Its economy shows a weakening of consumer spending due to a compounding increase in borrowing costs with periodic renewed storms in the banking sector.
In turn, in the labour market, we are seeing a smooth rise in unemployment and a slowdown in wage growth. Whether this growth will turn into a more severe recession depends on how hard the cuts in fiscal stimulus, rising mortgage rates (and the cooling of the property market as a consequence), and soaring fuel prices hit American households. We may see only a slight cooling of demand—or perhaps a full-blown recession.
'In this context, continued high rate policy by the Federal Reserve is disastrous and is unlikely to be used further because the current level of rates is sufficient to contain inflation,' said Kar Yong Ang, the Octa financial market analyst. 'This approach will maintain positive (albeit marginal, creeping) growth in the economy as a whole', he added.
Recent inflation data refreshes the big picture—the U.S. dollar is weakening
According to the data released by the U.S. Bureau of Labor and Statistics on 14 November 2023, the U.S. consumer price growth rate (CPI) in October decreased to 3.2% from 3.7% in September. The reported results were better than economists' forecasts of 3.3%. As core inflation came in below expectations, this was perceived as a factor that the Fed rate hike in December has been ruled out. These market expectations caused a sharp drop in the U.S. Dollar Index (DXY) to a 2-month low.
Before the release of the Labor Ministry report, traders were estimating an 86% chance that the Fed would keep the benchmark interest rate unchanged at the December meeting and a 25% chance of a 25bp hike in January 2024. However, after the release of the data, these expectations have changed dramatically: investors are almost 100% confident that the Fed has completed the current tightening cycle and may even cut rates at least four times in 2024.
'Investors now bet the world's major central banks will end their long series of interest rate hikes. Based on market expectations, no changes should be expected in the current and next quarter,' said Kar Yong Ang, the Octa financial market analyst. 'Deflation is likely to force the Fed to lower the benchmark rate in late 2024 to the 2.50%–2.75% range', he added.
The slowdown in the U.S. labour market, lower inflation, and market expectations of a rate cut in 2024 make it possible to capitalise on the weakening dollar in the short term. The USDJPY currency pair looks like the most exciting instrument—a solid technical picture confirms the dollar's decline here. The price tested the previous year's high, which is now a resistance level, ensuring the potential decrease of USDJPY to the range of 144.00–144.50 by the end of the current year.
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