Well, that was an uneventful Federal Reserve policy meeting. The Federal Open Market Committee (FOMC) completed its two-day November powwow, leaving interest rates unchanged at a range of 5.25% and 5.5%. The financial markets widely anticipated the decision to hit the pause button again, which explains why the leading benchmark indexes were subdued following the FOMC statement. As is typically the case, investors paid more attention to Chair Jerome Powell’s press conference, hoping that America’s chief money printer would offer a hint of when a new era of easy money would be born.
A November at the Federal Reserve
The Federal Reserve skipped another rate hike so officials could scan the economic landscape and determine if its quantitative tightening efforts have produced real results. The Eccles Building also intends to keep trimming its balance sheet by $95 billion per month. The FOMC statement essentially gave the US economy a clean bill of health, although it warned of a potential slowdown.
“Inflation remains elevated,” the FOMC statement said. “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
Looking ahead to next month’s do-or-die get-together, Powell noted that officials had yet to make any decisions for its final meeting of 2023. But while the futures market is penciling in a rate pause for the third consecutive month, the Fed Chair contended that it would not be hard to restart hiking. “The idea that it would be difficult to raise again after stopping for a meeting or two is just not right,” Powell said. “The Committee will always do what it thinks is appropriate at the time.”
That said, the Federal Reserve has not made a decision about any future meetings at all, including expectations of the much anticipated and desperately needed rate cuts. Because inflation is unlikely to return to the central bank’s 2% target rate at a sustainable level until 2025, policy makers are not even thinking about a rate cut. Instead, they are wondering if they should pull the trigger on another rate hike, according to the Fed head.
After arguing during his appearance at the Economic Club of New York last month that monetary policy was not restrictive, Powell declared that it was restrictive. This means that interest rates will neither support nor hinder growth. For some skeptics, it might be laughable to think that this is the case considering that real (inflation-adjusted rates) are around 1%. Still, the Fed chief was accurate when he told reporters that the effects of last year’s tightening are beginning to be felt since monetary policy functions with a lag and takes time to filter throughout the national economy.
Does this mean the US central bank could anticipate a recession? This past summer, the FOMC minutes reveal that staff economists removed their downturn forecasts, and Powell reiterated that any recession calls were not added back to the November meeting summary. Despite Powell’s reluctance to be a Cassandra, he repeated the clarion call of slower growth and softer labor market conditions to help achieve the institution’s 2% inflation target. “I still believe, and my colleagues for the most part still believe, that it is likely to be true that we will need to see some slower growth and some softening in the labor market to fully restore price stability,” he stated.
Indeed, Powell has called for below-trend growth on multiple occasions. Based on recent forecasts, his wish might come true. Just before the rate-setting committee’s announcement, the Atlanta Fed Bank trimmed its GDPNow Model estimate for the fourth quarter from 2.7% to 1.2%. While fourth-quarter gross domestic product results are still a long way off, it is eyebrow-raising that growth is seen an inch above 1%. And, of course, the main event will be on November 3 as the Bureau of Labor Statistics publishes the October jobs report, might allude to a slowing labor market.
Ultimately, Powell conceded that the US still has a long road ahead to normalizing inflation levels. Because of this, the Federal Reserve is bracing everyone for a climate of higher-for-longer interest rates.
Hoping for the Best
The most compelling part of the press conference was this statement from Jerome Powell: “We have come very far with this rate-hike cycle and are close to end of the cycle.” A single sentence might not mean so much, but it alludes to one thing – memory loss. In November 2022, Powell remarked essentially the same thing, triggering a rally in the stock market for a few months until the reacceleration in inflation transpired. Wall Street is betting that rate cuts are happening in the third quarter of 2024, but the bulls and bears had also anticipated some type of easing this past summer, which was not realized. In addition to the “higher-for-longer” mantra, the Fed’s new slogan could be “hope for the best.”