The Fed October/November meeting; outcome much as expected. Not even thinking about rate cuts.
Positive equities reaction; gold spikes quickly down then rebounds
The comments from some Fed Committee members on the run-up to this most recent meeting were foreshadowing the outcome – i.e. that the rise in bond yields since April have helped to alleviate any pressure to raise fed funds target rates further. The December meeting (12-13th) will carry the dot plot and it will be interesting to see if there is any material change from that of September, in which there was a massive range of target fed funds expectations for end 2024 – from 4.25% to 6.25%, while the range for end-2025 was even wider (2.75% to 5.75%).
Fed Dot Plot, September
Source: Federal Reserve Board
This meeting’s statement was barely different from the September iteration, apart from “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low” compared with “Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low”; if anything this month’s comment is slightly more aggressive than the previous, but the difference is minimal. And that was it. The Committee will continue to look at the cumulative effect of recent policy, and stands prepared to adjust when and if necessary.
In his Press conference Jay Powell reiterated that without price stability the economy does not work for anyone, that a strong and stable labour market would not be viable; and that the full effects of the tightening have yet to be felt. Future decisions about the extent of future firming and the duration of its restrictive nature will remain data-dependent.
Ten year bond yields rose from 3.3% in early April to 5.0% in mid-October; latest at 4.7%
Source: Bloomberg, StoneX
Consumer spending is leading to a forecast Q3 GDP of 4.7%, the housing market is flattening and the supply and demand sides of the labour market are moving towards balance; nominal wage growth has shown some signs of easing and while the jobs:workers gap has slowed, labour supply continues to exceed available jobs. The Core PCE is now at 3.7% and while inflation readings are moderating there is still a long way to go.
Asked about the extent to which the rise in long-term bond yields had influenced this meeting’s decision, he set the scene in the context of the economy and said that the Committee is not yet confident that it has done enough to achieve the longer-term 2% inflation target. He said that current influences including higher rates, and the stronger dollar and lower equity prices could matter for future rate decisions provided that two conditions are satisfied: a) tighter conditions would need to be persistent; and b) higher longer-term rates must not simply be an anticipation of tighter monetary policy. That said, he noted that the current bond market position does not appear to be a reflection of monetary policy expectations, but in the meantime the impact of higher rates on economic activity is perhaps the “most important thing”.
The Committee is not thinking about rate cuts at all. The first question, still being addressed, is “have we achieved a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% sustainably over time”.
The next major question will be “for how long will policy remain restrictive?” to which the answer is “as long as necessary to be confident that inflation is on a sustainable path down to 2%”.
They do not yet have that confidence. Rate cuts are not on the table, as a viable positive answer to that first question is the key.
Higher for longer.
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