Morningstar Research (Thailand) projects US inflation to drop sharply in the first half of next year, saying the Federal Reserve is doing more than is required to bring inflation back to 2%.
The Thai unit of the Chicago-based financial services firm expects the Fed Funds rate to peak at 4.25-4.5% early next year, compared with the market estimate of 5%-5.25%.
The US central bank on Wednesday hiked the rate by another 0.75%, the fourth consecutive increase of this size, to a range of 3.75-4.00%. The rate has been increased six times this year to date from zero at the start of the year.
The consumer price index (CPI) was up 8.2% year-on-year in September. The core CPI, which excludes food and energy prices, has remained stubbornly high, averaging 6% annualised growth in the past three months, holding more or less steady since the start of 2022, Morningstar noted in its research.
"The Fed's interest rate adjustments will depend on the economy. Morningstar expects inflation to return to normal, with slowing economic growth leading to lower interest rates next year," it said.
The Fed is expected to start cutting rates in the middle of next year, said the research firm.
"There is some risk the Fed overtightens, and based on our projection of inflation reaching 1.4% in 2024, the Fed is exceeding what needs to be done to bring inflation back to 2%," said Morningstar.
Bond yields have been fairly flat in recent weeks, but soared compared with the start of 2022. That raised the cost of borrowing for consumers and businesses. The 30-year mortgage rate reached 7.08% last week -- the highest level since 2002. The housing market is already registering a steep decline, and broader impact on economic activity is sure to follow.
Morningstar agrees with the Fed's rate hikes to curb inflation, saying the central bank can adjust its approach to stimulate the economy if rates are too high. If rates are too low, then inflation risks becoming entrenched, which will ultimately raise the costs of restoring inflation back to normal, said the firm.
However, in the long run interest rates are likely to subside regardless of the Fed's tactics as long-term forces such as demographic trends remain. Morningstar anticipates a 10-year Treasury yield of 2.75% in 2026 and beyond, compared with 4.1% today.
