Thomas Costerg, Senior US Economist Pictet Wealth Management.

Fed likely to push through with another major rate hike as employment stays strong

The solid June US employment report contrasted with most other recent US economic data (and in particular weak business and consumer surveys).

Non-farm payrolls grew a solid 372,000 in June, only slightly below 384,000 in May. The unemployment rate was unchanged at 3.6%.The solid headline figure means that the Fed will brush off recessionary noise and remain focused on its main worry that high inflation expectations become entrenched. It is therefore more likely to deliver a 75bps rate rise at its 27 July meeting than a 50bps one. We continue to think the Fed will moderate the pace of rate increases after summer, settling on hikes of +25bps (instead of +75bps) from September until December, when we expect the Fed rate to peak at 3.25%.

This is because we think that US economic data could continue to erode and extend to employment figures, causing the Fed to alter its single-minded focus on inflation. Our macroeconomic scenario remains that the US will experience a mild economic recession in early 2023.

However, we do recognise that the Fed could decide to front-load rate hikes (going for +50bps in September instead of +25bp, for example) but then end its rate-hiking cycle earlier.

Nevertheless, the outlook for rate hikes also depends on commodity prices (particularly oil prices), which seem, in recent weeks, to be central to the Fed’s reaction function. This contrasts with the long-standing Fed tradition of ignoring commodity volatility, seen as outside monetary policymakers’ control.