Due to the hawkish remark made by US Federal Reserve Chair Jerome Powell on the Fed’s bond-purchasing program on Friday, the dollar gained strength versus the pound. Another factor contributing to the strengthening of the dollar was a slew of encouraging economic statistics. According to Federal Reserve Chair Jerome Powell, the central bank should begin the process of lowering its support for the economy by scaling down its asset purchases, but should refrain from raising interest rates at this time.
When the economy reaches full employment and inflation reaches the central bank’s 2 percent target, the Fed has promised to maintain its benchmark overnight interest rate at its current near-zero level for an extended period of time. Inflation is currently on track to remain moderately above that target for some time. The Federal Reserve has indicated that it would likely begin tapering its $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities as early as next month.
Approximately half of Fed officials feel that a rate rise will be required in 2022, with a few saying that it may be necessary as soon as the summer. The other half of the Federal Reserve’s rate-setters believe that rate increases are not necessary until 2023, and one of them, Minneapolis Fed President Neel Kashkari, believes that they are not necessary until 2024.
Recent data, on the other hand, seems to be supporting the arguments of those who are pressing for a faster increase in borrowing rates. Consumer prices have been growing at a rate that is more than double the Federal Reserve’s goal rate. The US budget deficit reached $2.772 trillion in the fiscal year 2021, the second-highest level on record, compared to the $3.132 trillion recorded in the previous fiscal year.
While receipts increased by 18.3 percent to $4.046 trillion, primarily due to higher individual and business income taxes as a result of the recovering economy, outlays increased by 4.1 percent to $6.818 trillion, primarily due to continued spending to counteract the devastating effects of the pandemic.
The deficits in both years were only outstripped by a $1.4 trillion shortfall in 2009, which occurred under the Obama administration, as a result of increased expenditure to pull the nation out of a severe recession after the 2008 financial crisis, which occurred during the Bush administration.
Only in September, the last month of the fiscal year, did the budget deficit reach USD 62 billion, compared to a USD 125 billion shortfall a year earlier and market estimates of a USD 60 billion shortfall in September.
Because earnings jumped by 23.1 percent to $460 billion and outlays increased only by 4.7 percent to $521 billion, this was the narrowest budget difference since January 2020. The yield on the benchmark US 10-year Treasury note fell to 1.64 percent on Friday, down from a 5-month high of nearly 1.7 percent, after Federal Reserve Chair Powell warned during a virtual conference that supply constraints and elevated inflation are likely to persist for a longer period of time than previously anticipated, possibly well into next year.
Powell said that the Federal Reserve is prepared to begin tapering, but that it is too soon to hike interest rates. According to the most current PMI statistics, service sector growth has risen to its fastest pace since July, while industrial production has grown at its slowest rate in 15 months. The Federal Reserve is on schedule to begin tapering even though it would be premature to increase interest rates, according to Fed Chair Powell, who spoke on a panel at the Centenary Conference of the Virtual Bank for International Settlements and the South African Reserve Bank.
Also emphasized by Powell is the fact that supply constraints are still a concern, and in certain circumstances, have become worse lately. At the same time, rising inflation and wage pressure will certainly continue into next year, but will begin to subside. “However, if we observe a substantial danger of inflation expectations growing in a consistent manner, we will utilize our instruments,” the Chair said.
However, policymakers have agreed that the tapering of emergency pandemic assistance should begin in either mid-November or mid December, with the fed funds rate remaining unchanged at 0-0.25 percent and bond purchases continuing at their current monthly pace of $120 billion, respectively, during the September meeting.
An estimate revealed that the IHS Markit US Composite PMI increased to 57.3 in October 2021 from 55.0 the previous month, according to a preliminary estimate. After three months of rapid growth in business activity, the most recent report indicated a substantial increase in total activity, with service sector growth accelerating to its best level since July, according to the most recent reading.
While this was going on, industrial production climbed at its slowest rate in 15 months, reportedly due to material shortages and supply chain bottlenecks. Although at a slower rate than in the previous three quarters, new work continued to flow in at a steady pace, though at a slower rate than in the previous three quarters. Meanwhile, the level of outstanding business increased at a series record rate, and the rate of job creation was the fastest since June.
On the cost front, both input and output expenses increased at historically high rates. Finally, the degree of confidence in the economy’s ability to produce in the year ahead fell to its joint-lowest level in eight months. IHS Markit’s US Manufacturing PMI plummeted to 59.2 in October of 2021 from 60.7 in September, marking the lowest reading since March and far below market expectations of 60.3, according to early estimates.
The number indicated that industrial activity had slowed for the third month in a row after a record increase in July, despite the fact that the increase was significant overall. It indicated a slower rate of increase in production as well as a slower rate of expansion in order book growth.
Production increased at the slowest rate since July 2020, and input costs increased at a new record rate, as a result of material shortages, logistical difficulties, and higher commodity prices, among other factors. In addition, suppliers’ delivery times reached a new high in October, setting a new record. Supply constraints combined with strong sales growth pushed businesses to raise their purchasing activity and inventory levels even more.
According to a preliminary estimate, the IHS Markit US Services PMI increased to 58.2 in October 2021, up from 54.9 the previous month and well beyond market forecasts of 55.1. The most recent estimate indicated the most significant growth in services activity in three months, aided by the fastest increase in new business since July, which coincided with improved demand conditions.
At the same time, capacity demands increased as a result of reports that businesses were failing to keep up with rising sales as a result of labor disputes and supplier bottlenecks. Despite this, the rate of employment creation increased to its highest level since June. On the pricing front, input cost inflation was the second highest on record, while average charge inflation reached an all-time high, according to the Bureau of Labor Statistics.
