The NASDAQ retreats 10% from a record high, and the probability of the market betting interest rate hike in December falls to 70%: the hawks in the Federal Reserve insist on “walking slowly”

The Zhitong Finance App learned that on Thursday, two Federal Reserve officials publicly advocated raising interest rates in a small and steady manner to cope with inflation that is still higher than the target. This is the first round of public rhetoric from central bank officials after the Democratic Party won control of Congress and expanded seats at the state level, potentially changing the path of price pressure in the economy.

As the two officials spoke, the stock market was clearly falling due to investors' concerns about the future of the technology industry — the midterm election results may slow down investment growth in artificial intelligence and other fields, and AI was a topic that had previously caused strong voters' dissatisfaction.

“Progressive” has become a common keyword

Cleveland Federal Reserve Chairman Beth Hammack said in a speech before an event in Zurich: “I expect monetary policy will need to shift to a restrictive stance and pull inflation back to 2% in time.”

One of the strongest supporters within central banks who insist on raising interest rates believes that “where possible, this position should be achieved through more frequent minor adjustments” — an approach that is less disruptive to households, businesses, and financial markets. She also said that gradual interest rate hikes will also help prevent an “inflationary mentality” from taking root among the public.

Richmond Federal Reserve Chairman Thomas Barkin echoed Hammack's path judgment in his speech in Charlotte. He said that inflation is “too high” and is “trading at a high level” rather than falling. For central bank officials, “the meaning of the policy is quite straightforward,” and as for the pace of future interest rate hikes, “it is reasonable to gradually.”

Interest rates have been raised in September, and there are still variables in December

Last week, the Federal Reserve kept the benchmark interest rate unchanged in the 3.75%-4.00% range, although policymakers have acknowledged that inflation is higher than expected. The Federal Reserve raised interest rates in September. Currently, the market generally expects another rate hike in December, but the path after that is still unclear.

Both Hammack and Federal Reserve Governor Lisa Cook voted for interest rate hikes last week. The regional Federal Reserve chairman also voted against it at the end of July because the Federal Reserve was on hold. She has always maintained that the degree of relaxation of monetary policy and overall financial conditions is not sufficient to form the necessary restrictions on the economy to suppress inflation.

Notably, the statements made by the two officials on Thursday on gradual interest rate hikes come at a time when Federal Reserve Chairman Kevin Warsh deliberately avoids providing policy path guidance — he believes that it is better for the market to evaluate prospects on its own than to rely on the Federal Reserve to provide a road map. However, even though Warsh withdrew from the debate, many other Federal Reserve officials are still actively speaking out about the necessity and possible forms of interest rate hikes.

Election results may ease inflation from the supply side

The current round of inflation gradually fell back to its target before Trump returned to the White House, then heated up again due to trade tariffs; this year, the president's war in the Middle East and overinvestment in the tech industry — companies are frantically expanding AI capabilities — further increased price pressure.

At the same time that the Democratic Party took over Congress, there was also voter boycotting data centers at the local level. This may provide some relief to the inflation outlook: limiting the construction scale of technology companies will reduce demand for equipment and other related investments, thereby easing price pressure.

Analysts at Evercore ISI pointed out in a report to clients on Wednesday that approval challenges in major states, including Texas, “will slow down AI capital expenditure to a certain extent, mitigate the risk of overheating within the next year or two, and may prolong the AI investment cycle.” The agency believes that this will “help maintain the balance between supply and demand in the overall economy without the need for more interest rate hikes”; however, it also pointed out in another report that the tightening of AI-related financial conditions “turned the balance by a weak margin” and raised interest rates one more time.

TD Securities, on the other hand, said, “We are still convinced” that the Federal Reserve will raise interest rates by a total of 50 basis points by the beginning of next year. The agency added: “If the midterm elections eventually lead to an end to the war in Iran, and/or AI investment is curtailed, the Federal Reserve may not need to tighten its policy further after March.”

Technology stocks plummeted, and the probability of interest rate hikes in December fell back to 70%

Technology stocks continued to be sold off on Thursday. The Nasdaq index retreated 10% from its record closing level nearly a month ago, the biggest one-day decline in 19 months. Investors are worried about the future of AI companies due to changes in political trends. The S&P 500 index also fell 4% in the afternoon; 10-year US Treasury yields rose in early trading and fell in the afternoon.

Investors are also cutting their bets on monetary policy and tightening interest rates, although interest rate hikes in the short term are still a probable event. Futures market traders are still betting that the December 8-9 policy meeting will raise interest rates, but the probability has dropped from over 80% on Wednesday to about 70%.

The Federal Reserve's policy outlook will face a new test on Friday — government employment data. The economists' survey estimates that 65,000 new jobs were added in October, up from the weak 29,000 in September; the unemployment rate is expected to stabilize at 4.2%.

Federal Reserve officials have stated many times before that the relative stability of the job market has given them the space needed to pull inflation back to the target, and that the employment sector itself is not a driver of price pressure.

According to analysts at BMO Capital Markets, employment data “is unlikely to replace stock market fluctuations and the changing political landscape as the primary driver of the macro narrative.” “If the October employment data is to shake up the Fed's interest rate hike ambitions, the threshold is very high... As long as the unemployment rate remains near current levels, even a disappointing non-farm report on Friday will not be enough to shake the overall judgment of 'the labor market remains stable'.”