With unanimity, the Fed opted to keep the fed funds rate unchanged but remains attentive to the idea that inflation risk should still be paid attention to.
As expected, and with unanimity, the Federal Open Market Committee (FOMC) opted to keep rates steady, with the fed funds rate remaining in a range of 5.25 - 5.5%, a 22-year high. In a nod to the recent surge in longer-term Treasury yields, the statement had the addition of the word “financial” in the statement relative to September: “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.” The Fed qualified that the “extent of these effects remains uncertain,” repeating that it “remains highly attentive to inflation risks.”
Another tweak made to the statement this month was the upgrading of the Fed’s characterization of economic conditions from “solid” to “strong.” The statement had a repeat of the “extent of additional policy firming that may be appropriate to return inflation to 2% over time,” with the Fed taking into account the cumulative tightening of monetary policy to date, as well as the variable lags in terms of the effects on inflation, the labor market and overall economic growth. Specific to the labor market, the statement’s reference to job gains was adjusted from “slowed in recent months” to “moderated since earlier in the year.”
Another focus of today was the quarterly refunding announcement from the Treasury department, which highlighted a tweak in issuance toward shorter-duration securities in response to recent yield moves. That led to a slight retreat in the 10-year Treasury yield to less than 4.8% (down from more than 4.9% prior to the announcement and down from the October 19 high of 5%).
As usual, these summary bullets will cover the first 30 - 40 minutes of Fed Chair Jerome Powell’s press conference, in the interest of getting this report into the publishing queue:
Equities gyrated from weaker to stronger in between the Fed’s announcement and the onset of the press conference. We believe the equity market will continue to key more off longer-term yields than shorter-term expectations of the Fed’s short-term rates policy.
We are of the view that if the economic data to come between now and the next FOMC meeting shows deterioration and/or disinflation persists, the likelihood of the July rate hike being the final hike in this cycle will move higher. However, neither the current labor market nor economic backdrop supports the market-based view that rate cuts could start by the mid-point of next year.
There is much variability in the span of time between the Fed’s final rate hike and subsequent initial rate cut. Over the 14 prior rate cycles since the late-1920s, the shortest span was 59 days in 1929—due in large part to the effects of the stock market crash of that year. The longest span was a whopping 874 days following the May 1981 final rate hike, as former Fed Chair Paul Volker was in the process of slaying the inflation dragon of the 1970s. We are unlikely to have to wait that long in this cycle, but absent more meaningful deterioration in the economy—particularly in the labor market, which is the Fed’s second mandate alongside inflation—the “longer” part of “higher for longer” needs to stay in focus.
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