The Federal Open Market Committee (FOMC) later today is widely expected to hold interest rates steady for a second meeting while also leaving the possibility of a 25 bp rate hike at the December meeting if U.S. economic growth remains buoyant. The FOMC’s rate decision and post-meeting press conference by Fed Chair Powell will be scoured for clues as to the future of Fed policy.
Fed Chair Powell has said policymakers would prefer to wait to evaluate the impact of past rate increases on the economy and see more economic data before deciding on additional rate hikes. With inflation still well above the Fed’s 2% target and economic growth near a 2-year high, Fed Chair Powell today may signal higher for longer interest rates. Jeffries LLC said the Fed will signal “a hawkish pause as the economy is doing well and inflation hasn’t gotten to target yet. They more or less have to continue to say we may need to raise rates one more time.”
The recent surge in T-note yields, with the 10-year T-note yield posting a 16-year high last week at 5.019%, has contributed to a tightening of financial conditions and may mean the Fed will have to do less to accomplish its goals. Deutsche Bank AG estimates the recent surge in bond yields could be the equivalent of as many as three quarter-point Fed rate hikes. Also, some hawkish Fed members, including Fed Governor Waller and Dallas Fed President Logan, have indicated that the yield surge suggests policymakers should be patient in making future rate moves.
The consensus is for no change in Fed guidance in today’s post-FOMC meeting statement. The committee may slightly tweak the language describing the economy, reflecting last week’s Q3 GDP report of +4.9% (q/q annualized) and continued solid job gains. Also, the FOMC may acknowledge recent tightening of financial conditions, which some Fed officials have highlighted in recent speeches. Fed Chair Powell has highlighted elevated geopolitical risks following the Israel-Hamas war, and the FOMC may also decide to include this as a risk in its statement.
Market reaction to today’s FOMC meeting may be muted as the decision is well anticipated. At his post-meeting press conference, Fed Chair Powell may be queried by reporters as to why a recent pickup in growth and above-target inflation didn’t prompt a rate hike. He may say that future hikes depend on the incoming data and that monetary policy works with a lag, so the full effect of higher interest rates hasn’t yet been felt in the economy. Ellen Meade, a former senior adviser to the Fed board and a research professor at Duke University, said, “Powell has to walk a fine line, and in general, the bias is for as little change as possible.“
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
