When will the Fed slow rate hikes? 📈

- Also: What exactly is the CHIPS Act? Will it impact semiconductor production in the US? Enjoy the top intelligence from Goldman Sachs. --------------------------------------------------------------- In today's edition: - Central banks like the Federal Reserve are on the move. But [how long will the current hiking cycle last?]( - The U.S. isn't likely to compete with Asia's production of semiconductors anytime soon. - And it could be a record year for stock buybacks. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- Pace of Fed hikes may slow down while rates inch up Federal Reserve Chair Jerome Powell signaled that the central bank is likely to slow the pace of rate increases to 50 bps in December after this week's jumbo 75 bps hike, according to Goldman Sachs Research. But the funds rate is likely to rise to a higher peak than policymakers had previously projected. Our economists expect the funds rate to top out at 4.75% to 5% next year, with some risk that the Federal Open Market Committee could raise the rate higher than that. “In his press conference, Chair Powell reinforced the message in the FOMC statement that slowing down is likely to be appropriate because the level of the funds rate is now much higher, the cumulative tightening to date is substantial and the magnitude and timing of its impact on the economy are uncertain,” Goldman Sachs economists led by David Mericle wrote in a report. “None of these points will change by the December meeting.” [Here are some key takeaways from the FOMC meeting](. --------------------------------------------------------------- How long will hiking cycles last? The Fed isn't the only central bank ratcheting up rates. The Bank of England increased its official overnight interest rate by 75 bps this week to 3%, as it tries to tame inflation. The European Central Bank has raised interest rates by a total of 200 bps over its past three meetings. Historically, hiking cycles in the G10 have lasted just over 15 months on average, and 70% of cycles lasted longer than a year, [according to a separate report from Goldman Sachs Research which analyzed 85 hiking and easing cycles from 1960 to 2019 across G10 economies](. - Our economists found that cycles tend to be longer in the U.S. than in the U.K., Canada and Australia. Surprisingly, the length of hiking cycles is similar across high- and low-inflation episodes. - Longer cycles didn't necessarily mean much larger increases in the policy rate. In fact, the policy rate increased by 200 bps in the median G10 hiking cycle and by 400 bps in the 1970s. This largely reflects central banks' front-loading rate increases, and it also suggests that central banks may turn significantly more cautious, slowing down the pace when they hike for longer. 75% of G10 hiking cycles featured a pause. - Policymakers tend to stop hiking when year-over-year inflation is still relatively close to its peak, rather than waiting for it to fall significantly. - Relatively large rate cuts tend to come fairly quickly after the hiking cycle ends. In the median cycle, the first cut came seven months after the last hike, with a cumulative 200 bps of easing within the first year. Across the G10, roughly 75% of the cycles involved a first cut within a year after the last hike. --------------------------------------------------------------- Semiconductor bill won‘t chip Asia's dominance The recently passed CHIPS Act earmarked $39 billion in federal funding to build chip manufacturing facilities in the U.S. While it may make the U.S. supply of semiconductors more resilient, it's not likely to make a dent in [Asia's dominance in the sector]( according to Bruce Lu, a technology specialist in Goldman Sachs Research. - Semiconductors power almost everything: cars, cellphones, washing machines, refrigerators and more. Demand for semiconductors is expected to accelerate in the future, according to GS Research. - Most of the world's semiconductor manufacturing takes place in Asia. The U.S.' share of global manufacturing has dropped to 12% from 37% in 1990. When the pandemic caused supply chain disruptions throughout Asia, access to chips became scarce. - That's where the CHIPS Act comes in. But even this new infusion of funding is expected to fall short because production costs have risen, says Bruce Lu. - The bill will help boost production, but GS Research says the incentives will only be able to “fully” support a roughly 1% increase in the U.S.' market share of global chip capacity. [Find out more about the CHIPS Act here.]( --------------------------------------------------------------- Buybacks boom as economy slows Buybacks, a practice that companies use to repurchase their own stock, have been surging in 2022, according to experts from our Global Markets Division. Companies are on track to repurchase about $1 trillion of U.S. stocks this year — the most in history, according to Neil Kearns, the head of the Corporate Trading Desk within U.S. Shares Sales Trading. (Last year's $992 billion of corporate repurchases holds the current record.) Despite broader market volatility, the rate of buybacks points to the still-robust health of U.S. companies, Kearns says. “It has been somewhat surprising through the most recent reporting period that U.S. earnings have held up so well,” Kearns says. “When you look at excess cash on balance sheets, it's still close to historic highs and absent alternate uses of that cash, investors are going to continue to demand that is returned to them.” Kearns says this process allows companies to demonstrate strength at a time of broader market weakness, while serving as a source of support for equity markets. He thinks the introduction of a share repurchasing tax in early 2023 could be a little painful for companies. How rising rates impact the economy and corporate earnings will have the most profound impact on capital allocation. --------------------------------------------------------------- BRIEFINGS brainteaser: The almighty dollar The U.S. dollar has surged in 2022 and continues to be the world's most traded currency. Can you tell us what the second-most traded currency is? A) The British pound B) The Japanese yen C) The Chinese renminbi D) The euro [Check the answer here.]( --------------------------------------------------------------- ICYMI: In the media [The Information]( November 1 [Expect a wave of private tech M&A in 2023, Goldman bankers say]( [WSJ]( November 1 [Goldman Sachs enters business of advising ETF launches]( [CNBC]( October 31 [Oil and commodities are the best hedge right now, Goldman's Jeff Currie says]( (02:02) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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