Fed’s Message to Markets: We may slow our pace, but a pause in rate hikes is not in sight
The Federal Reserve November rate decision
Last week the Federal Reserve (Fed) raised the fed funds rate by 75 basis points (0.75%) at its November FOMC meeting. This was the Fed’s fourth consecutive 75-basis-point rate hike, which brings the fed funds rate from near zero to 4.0% in about eight months, an unprecedented pace of interest-rate hikes in the U.S. economy.
While the initial release of the Fed statement seemed more benign – the FOMC acknowledged the cumulative tightening it had done and noted that these rate increases operate with a lag to the real economy – the press conference that followed with Fed Chair Jerome Powell took on a notably hawkish tone. In our view, there were three key messages that Chair Powell and the FOMC delivered at the meeting last week:
The Fed may move at a more gradual pace of rate hikes, but this does not mean a pause is coming:
While Chair Powell did acknowledge that the pace of rate hikes may slow, perhaps as soon as the December meeting, he emphasized that any discussion around pausing this rate-hiking cycle was still “very premature.” This reduces any likelihood of a pause in the December or perhaps even February meetings.The peak fed funds rate is likely higher than what the FOMC outlined in its September meeting:
Chair Powell also noted that recent data indicates the ultimate interest rate will be higher than what was outlined in the September FOMC meeting. In September, the Fed laid out a set of economic projections that indicated the peak fed funds rate would be around 4.6% sometime in 2023. However, Powell seemed to endorse a higher terminal rate in last week’s meeting, perhaps moving more in line with market expectations. In fact, market expectations for a peak fed funds rate of 5.0%-5.3% sometime in the first half of 2023 have remained generally steady, even after the Fed meeting.
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