The Federal Reserve has taken an aggressive stance towards interest rate hikes this year, leading to forecasts suggesting that American consumer spending could drop off more rapidly than previously anticipatedThis accelerated decline in consumption could set the stage for significant interest rate cuts in 2024 as the Fed responds to changing economic conditions.

Recent data released on October 14th highlights that U.Sretail sales and food services saw a year-on-year growth of 8.2% in September, a slight dip of 1.2 percentage points from AugustHowever, the three-year average growth rate—which is often a more reliable indicator of actual economic trends—actually increased by 0.2 percentage points to 9.7%, matching the average since February 2022 and surpassing the 2019 average by 5.7 percentage points.

Since the rate hikes commenced in March, the Federal Reserve has rapidly intensified its monetary tightening efforts

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By September, total increases had reached 300 basis points, settling in the target range of 3% to 3.25%. Surprisingly, retail data indicates that this swift increase in interest rates has not sufficiently countered the excess purchasing power that Americans accumulated due to substantial government subsidies during the pandemic, thus perpetuating highly elevated consumer demand for goods.

Large one-time fiscal subsidies typically result in an increase in household savingsThis situation has two significant implications: firstly, it raises consumer expectations regarding future wage growth; secondly, it can maintain high levels of consumer demand for an extended period, particularly in the context of ongoing pandemic conditions that prompt steady consumption of goods.

In September, the U.S

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Consumer Price Index (CPI) rose by 8.2% year-on-year, a figure that stayed stable from the previous month but remained firmly entrenched within a high rangeNotably, sectors contributing significantly to the overall CPI—housing and core services—witnessed a month-on-month increase of 0.8%. This uptick pushed the contribution of core services to the annual CPI by 0.4 percentage points, maintaining the high year-on-year growth.

Amidst a tightening global oil supply and rental increases that may persist for another year, inflation in the United States is expected to remain notably challenging through 2023. Recent developments in the oil market, particularly OPEC's announcement to cut production by two million barrels per day, signal that oil prices may remain elevated into the first half of next year, complicating the inflation landscape further.

The sharp rise in interest rates has begun to exert some downward pressure on housing prices only recently, specifically from June onwards

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Historical data reveals that rent often lags behind housing price increases by approximately five quarters; thus, it is feasible that higher rent increases could persist into the third quarter of 2023. This suggests that the receding rate of core inflation may not be as rapid as many market observers are expectingConsequently, the duration of the current inflation cycle may extend longer than anticipated, with a potential rise in the inflation baseline.

Beyond oil and housing, American households still possess savings significantly above their typical levelsThis surplus could lead to a prolonged period of heightened consumer demand, which further poses a risk of keeping inflation elevated for an extended timeframe.

An examination of the recently released inflation and retail data for September provides deeper insights into four key short-term inflation risks highlighted by the Federal Reserve's September FOMC meeting minutes: a tight labor market, rising energy prices, supply chain disruptions, and the resilience of service prices, particularly rents

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Given the Fed's current strategy of relying more on fresh economic data—and less on subjective forward-looking forecasts—for future decision-making, the likelihood of an extraordinary 75 basis points rate hike in November and a subsequent increase of 50 basis points in December appears to be substantially elevated.

However, this reinforced trajectory of interest rate hikes might accelerate the reduction in consumer demand in 2023 and could further dampen housing pricesSuch dynamics could lead to a swift decrease in rental price increases after Q4 of 2023, paving the way for significant interest rate cuts by the Federal Reserve in 2024.

In contrast to other developed economies grappling with synchronized monetary tightening, the current supply-demand dynamics of the U.S

real economy appear relatively robustIn contrast, the UK and European economies are facing substantial energy crises and severe disruptions to their industrial supply chainsAs a result, the U.Sdollar index is anticipated to maintain a high level for an extended period, potentially continuing to strengthen.

For China, the strengthening of the dollar presents significant challenges for the renminbi against the dollarHowever, China's capital account remains relatively constrained, and during the pandemic, enterprises exhibited caution in borrowing foreign debtCoupled with an intentional upgrade of the manufacturing supply chain, the external spillover effects of the Fed's rare and aggressive tightening on China's monetary policy are expected to be minimalAs a result, the effective exchange rate of the renminbi may stabilize near historical highs, with predictions suggesting that it will continue to fluctuate around 7 to 7.1 against the dollar by year-end.