The Federal Reserve (Fed) has made a string of large 0.75 percentage point hikes at their last three policy meetings. They don’t meet this October. They will meet on November 1-2, announcing their interest rate decision on at 2pm EST on Wednesday November 2 accompanied by a press conference.
The markets currently see a 7 in 10 chance of 0.75 percentage point rate increase and 3 in 10 chance of a 0.50 percentage point hike according to the CME’s FedWatch Tool.
The Fed has been clear over recent weeks that it is not satisfied with current U.S. inflation. It also does not consider current monetary policy especially restrictive.
The Fed also keeps a close watch on unemployment, and so far the U.S. jobs market is running relatively hot. That matters as it give the Fed more freedom to fight inflation without too much concern for impacting the jobs market, so far.
The Fed is maintaining a clear inflation fighting tone in its recent speeches.
Atlanta Fed Chair Raphael Bostic stated on October 5, that the U.S. economy is “still decidedly in the inflationary woods.”
At the most recent Fed policy meeting on September 22, Chair Powell said the following. “Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate.”
Fed Vice Chair Lael Brainard said on September 7. “We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.”
What Could Change
Of course, the Fed always makes it clear that monetary policy is data dependent. There are several considerations that could change the Fed’s position.
The first is evidence that inflation is trending down. We are due several more inflation reports before the Fed meets. So far the Fed has mainly seen swings in energy costs reduce headline inflation figures, but underlying prices, especially for food and housing, continue to rise at a concerning rate.
Unfortunately, early forecasts of upcoming inflation releases are not that encouraging. However, it’s still possible the Fed sees some signs of prices moderating in the details of these reports, or that forecasts don’t prove to be accurate.
The Jobs Market
U.S. unemployment has been historically low. That’s given the Fed some freedom to fight inflation without excessive fear of the broader impact to the U.S. economy.
However, recent data has shown that U.S. job openings have decreased. This suggests that the U.S. labor market may be starting to worsen. This may mean the Fed has to manage risks on both sides in wanting to tame inflation, but also to maintain economic growth. If the jobs market does weaken, then a U.S. recession becomes a greater risk.
It’s unlikely that the economic news will shift dramatically before the Fed’s November decision.
The strong dollar has helped the Fed this year. A stronger dollar dampens demand for U.S. exports and also makes U.S. imports less expensive. That should have an impact on reducing U.S. inflation, all else equal. If the dollar were to weaken after its strong run in 2022, that might require incrementally higher interest rates from the Fed.
A Desire For Wait And See
One point that frequently appears in Fed speeches is that monetary policy works with unpredictable lags. The Fed has moved extremely aggressively in 2022 on interest rates and will likely continue to do so at the next two meetings.
Therefore, there are some voices starting to call for a pause in hikes to better analyze and wait for the impact of recent decisions to be felt. It’s early days on that. For now the desire to aggressively fight inflation is winning out.
Still, over the coming months, it will be worth watching to see if certain policy-makers are inclined to take more of a wait and see attitude to better assess the economic impact of recent large rate moves. The upcoming release of minutes from the Fed’s September meeting this month may provide some early clues to whether that wait and see perspective is gaining traction.
What To Expect
So markets fully expect rates to rise once again on November 2, the main question is how much, with a 0.75 percentage point move viewed as most likely. The question then is how the Fed sees rates moving at the December meeting and into 2023.
Currently the markets suspect that the Fed will start to ease off on hikes in 2023. However, if inflation continues to come in hot and the U.S. economy appears relatively robust, that expectation may change. On the other hand, if a full recession is on the cards and inflation does start to moderate, 2023 rate cuts are even a possibility.
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