Another Record Hike, but Hints of Downshift
The Federal Reserve raised rates by 0.75% for a fourth consecutive time, as the central bank continues to try slow inflation.Download PDF
- As expected, the Federal Open Market Committee (FOMC) increased the federal funds target rate range to 3.75% to 4.00%, a 0.75% increase. It was the fourth consecutive 0.75% increase.
- The Federal Reserve continued to reiterate its hawkish stance on raising rates to slow inflation to 2%, but indicated that it will “take into account” the potential impact of monetary policy on economic activity.
- The committee had only minor language changes in its November statement, as past rate hikes appear to behaving the intended impact of slowing U.S. inflation.
At their November meeting, Federal Open Market Committee (FOMC) members agreed to hike the fed funds rate once again by 0.75%, raising it to the 3.75% to 4.00% range. It was the fourth consecutive 75-basis-point hike, a Federal Reserve (Fed) record. The action taken this week by the Fed lifted the real policy rate to a restrictive position in the eyes of all participants in light of the Personal Consumption Expenditures Price Index (PCE) inflation forecasts from the Summary of Economic Projections (SEPs). At the September FOMC meeting, the SEPs showed PCE revised higher for the rest of 2022 and 2023, as well as a higher mark for the fed funds rate, which was expected to top out at 4.6% in 2023.
Recent Fed speak leading up to this week’s FOMC meeting had painted a more optimistic picture for markets, and risk assets rallied leading into the Fed week. The S&P 500 Index and Bloomberg US Aggregate Bond Index were up 3.97% and 1.65%, respectively, the week before the meeting.
While the Fed has continued to increase its benchmark rate and reduce its balance sheet, consumer prices and wages have continued to climb. New economic data released last week showed core PCE in September had increased 0.5% on a monthly basis and 5.1% over the last year, a jump from the 4.9% annual rate recorded in August. The Employment Cost Index, a measure of wages tracked by the Labor Department, increased 1.2% in the third quarter (down from 5.1% in the second quarter) and 5% year-over-year. The modest deceleration in wage growth wasn’t enough to stop the Fed from enacting another 75-basis-point rate hike, and it may not be adequate to stop the committee from delivering another 50-basis-point rate hike in December.
Below are the language changes made in the Fed’s statement from September:
After the Fed announcement, the 10-year Treasury ended the day higher and finished at 4.10%; short and long rates were higher for the day.
Markets closed in negative territory on the final day of the FOMC meeting. Both the Dow Jones Industrial Average (-1.55%) and S&P 500 Index (-2.50%) moved lower during Chair Jerome Powell’s press conference. Treasury yields across the curve finished the day mostly higher following the release of the Fed’s statement.
At his press conference, Chair Powell provided some insight into the Fed’s crystal ball, acknowledging the slowing economy and long lags in seeing in the effects of the Fed’s monetary policy may potentially warrant a pause in rate hikes in the future. While this was a sentiment many investors had been expecting, Chair Powell also made sure to hedge any of the residual pre-FOMC euphoria by reminding markets that any potential pause in rate hikes was “very premature” at this time. Chair Powell indicated that while the committee may discuss a pause in hikes at the December meeting, there will also be a consideration about how long to leave rates at those elevated levels since the SEPs have continued to trend higher.
While Chair Powell stated that today’s markets have been much different than in the past, we believe one should be careful in trying to predict a pause in rate hikes as there may be greater harm done to the economy by pausing rate hikes too early vs. overshooting and then using the Fed’s tool chest to reset rates to more reasonable levels.
The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
Personal Consumption Expenditures (PCE) refers to a measure imputed household expenditures defined for a period of time.
The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.
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