Strong September U.S. job data showed that the U.S. economy is still running faster than the Federal Reserve would like, making it all but inevitable the central bank will continue to raise the federal fund interest rates through the end of the year in an attempt to curb inflation, according to Charles Schwab’s Schwab Market Perspective.
The Federal Reserve is trying to slow down economic growth to prevent inflation from becoming entrenched. WSJ
Higher interest rates imposed by the Federal Reserve don’t affect the U.S. economy only—the pain spreads around the globe as other countries’ currencies weaken against the U.S. dollar.
The Fed combats inflation by slowing the economy through tighter financial conditions — such as higher borrowing costs and lower stock prices — which curb spending, further reducing employment, income and spending.
The Fed has raised its benchmark lending rate by three percentage points so far this year, but you wouldn’t know that from the burgeoning jobs market.
Fed Chair Jerome Powell has acknowledged that the central bank’s fight against inflation will likely involve “pain for some households and businesses,” alluding to the risk of recession and rising unemployment. However, the Fed’s moves are also causing pain beyond U.S. borders.
The Fed is often referred to as the “central bank to the world” because its policies have a big influence on the global economy. Because the dollar is the world’s reserve currency, U.S. interest rate changes ripple across the globe in the form of currency volatility.
Meanwhile, this month’s announcement by OPEC+ members that they will curb oil production may not have as big an impact on oil prices and global inflation as some investors fear.
Source: Charles Schwab, Bloomberg data as of 10/8/2022.
Historically, OPEC hasn’t driven oil prices—it has followed them. OPEC output tends to lag changes in oil prices by about three months, meaning the cartel tends to cut oil production after prices fall when demand weakens, and increase it after prices are already rising when demand improves.
And demand for oil has been weakening. The International Energy Agency’s September Oil Market Report projected that oil markets would be oversupplied by 1 million barrels per day (mbpd) in the second half of calendar year 2022.
As a result, the OPEC cuts aren’t likely to be a meaningful driver of global inflation or the economy, but could instead serve as a lagging indicator of the slowing demand for oil as the global economy weakens, projects the Charles Schwab Schwab Market Perspective.
- https://www.schwab.com/learn/story/market-perspective
- Nick Timiraos, Flush Consumers Vex Fed Strategy, The Wall Street Journal, October 31, 2022, pp. A2.