Barclays: The Federal Reserve may raise interest rates by 25 basis points again in December.

The rise in US bond yields has to some extent replaced the tightening effect of interest rate hikes, but Barclays believes it is not yet time to end the rate hikes.

On October 18th, Barclays analysts, including Marc Giannoni, stated in a research report that the Federal Reserve is likely to pause rate hikes in November and is very likely to raise rates by 25 basis points again in December.

Barclays pointed out that since the September FOMC meeting this year, long-term bond yields in the United States have risen sharply, with 10-year and 30-year Treasury yields reaching new highs since 2007. This has pushed up other interest rates, including mortgage rates and corporate bond yields, and provided the FOMC with more time to assess upcoming economic data.

This research report was published before Powell's speech this week. In his speech on Thursday, Powell believed that the Federal Reserve is making progress in "maximizing employment" and "stabilizing prices," and said that "the rise in bond market yields may mean that there is no need for further rate hikes."

Powell's latest speech, seen as the "voice of the Federal Reserve" and referred to as the "new Federal Reserve News Agency" by financial journalist Nick Timiraos, confirmed market expectations that there will be no rate hike in November, "unless there is clear evidence that economic resilience will jeopardize progress in inflation reduction."

However, Powell also mentioned in his speech that the current monetary policy of the Federal Reserve is "not too tight," implying that there may still be room for further tightening.

He said that slowing down the pace of rate hikes this year allows tightening actions to take effect, but "interest rates may not be high enough and have not been maintained for long enough"; "Many signs indicate that the labor market is returning to a balanced state. Business leaders tell me that the US economy is still strong," which means "the economy has handled the series of rate hikes well."

Nick Timiraos also believes that the unexpectedly strong September non-farm employment data and this week's retail sales, industrial output, and other data make it difficult for the Federal Reserve to announce the end of rate hikes, and Powell did not make such a call on Thursday.

This view is similar to Barclays'. Barclays stated that "these upward trends in data indicate that the US economy is still far from the FOMC's targets, and the unexpected rise in core CPI indicates that inflation is more stubborn than previously imagined":

"In terms of employment, the number of jobs increased by 336,000 in September, while the market generally expected 170,000; retail sales grew strongly by 0.7% month-on-month, even exceeding our expectations; manufacturing production showed widespread growth.

In terms of inflation, core CPI unexpectedly rose in September, reflecting a sharp rise in housing inflation. This indicates that the sharp decline in June and July exaggerated the extent of the anti-inflation measures, and inflationary pressures are more stubborn than previously imagined." Therefore, Barclays believes that assuming long-term yields will not continue to rise significantly, there is still sufficient reason for the FOMC to raise interest rates again.

The September Summary of Economic Projections (SEP) emphasized the committee's optimistic outlook on inflation, with economic activity expected to moderate only slightly in 2024 and the labor market remaining tight.

Nevertheless, FOMC participants may still consider a 25 basis point rate hike before the end of the year to be appropriate.

Analysts say the key is to what extent the rise in long-term interest rates has tightened:

If there is no rise in long-term yields, the developments in these data would prompt the FOMC to adopt a rate path consistent with or possibly higher than the one forecasted at the September meeting, thus leading to another rate hike at future meetings.

The key question is to what extent the rise in long-term yields has tightened.

Currently, we believe that the higher long-term yields partly reflect a stronger economy, and further tightening measures are still needed to moderate the economy and bring the inflation rate back to the 2% target.